There is a way for income investors to partake in the structural growth trends behind the surging FAANG stocks, even though these five companies do not pay out a dividend, according to Aviva Investors’ Richard Saldanha.
2020 has proved to be a difficult year for every type of investor as the economic impact of coronavirus have been far reaching and devasting.
The crisis has proved to be especially hard for income investors as they have had to deal with many companies cancelling or suspending their dividends to strengthen their balance sheets.
But this hasn’t changed the fundamentals of finding good income stocks, Aviva Investors Global Equity Income manager Saldanha said. Despite the crisis, there are businesses with strong cash flows and balance sheets and can grow and deliver their dividend sustainably.
“As low interest rates persist, income investing still holds the promise of attractive returns,” he said.
In this hunt for income, Saldanha said investors should avoid the “red herring” distinction between value and growth stocks.
This is because “pigeon-holing” stocks either value or growth means that investors aren’t focusing on a company’s long-term resilience or how it’s placed in the world to meet and benefit from ongoing changes.
Following this, Saldanha said one trend income investors should look to take exposure to this that driving the FAANG stocks, specifically the income alternatives to these well-known names.
Made up of Facebook, Amazon, Apple, Netflix and Google, the FAANGs have dominated for a decade as the vanguard of the tech growth rally which has been leading markets both before and during the coronavirus crisis.
Performance of sectors and indices YTD
Source: FE Analytics
“These companies undoubtedly play a pivotal role in our lives, and in many cases may benefit further from the Covid-related increase in remote working and the shift to e-commerce,” Saldanha said.
Unfortunately for income investors, none of these tech-giants pay out a dividend. But this doesn’t mean that income investors have to miss out on the FAANGs’ structural growth trends, Saldanha said.
“These firms are usually thought of as growth stocks. But having an income focus does not mean investors cannot participate in the long-term structural growth trends that have been driving Big Tech this year; it’s a matter of finding the right opportunity at the right price,” he added.
Looking at cloud computing as an example, the usefulness of this technology has been exemplified during the coronavirus lockdowns as it has allowed businesses now forced to work from home to maintain some synergy with its employees.
This technology has been a “meaningful driver of the financial performance of the likes of Amazon,” Saldanha said, noting its Amazon Web Services (AWS) platform.
Another key player in cloud-technology is Microsoft, which saw a significant uptake of its Azure cloud software.
“Income investors may assume this trend is out of their reach, but there are dividend-paying companies in the sector,” Saldanha said.
One option is US company CoreSite, which currently has a dividend yield of 3.99 per cent. The company owns and operates a large number of US data centres and its customers include some of the FAANG stocks, namely Amazon, Microsoft and Google.
CoreSite’s share price over 5yrs
Source: Google Finance
Another significant, long-term growth trend Saldanha highlights for income investors is the rise of electric vehicles (EV).
“EVs are set to play a crucial role in helping companies and countries around the world meet stricter carbon emissions requirements,” the manager said.
“We are now seeing governments – particularly in Europe, but also globally – direct stimulus to the industry via incentives and scrappage schemes that are directly targeted at increasing the adoption of EVs and helping bridge the affordability gap for consumers.”
Arguably the biggest poster boy for EVs is Elon Musk’s Telsa. Featured in music videos and marketed as the next ‘It’ car to have, Tesla has successfully moved from being a niche car manufacturer into a mass-market electric and clean energy car marker, at a time when interest in sustainability has increased both in investing and public awareness.
“The stratospheric rise in Tesla’s share price this year illustrates the strong investor interest in this area,” Saldanha said.
Although not technically a FANNG stock, Tesla shares many of the group’s characteristics. It is part of the tech-growth trend which has played an outsized role in the equities rally and it also has high valuations. And for income investors it also doesn’t pay a dividend.
Tesla’s share price over 5yrs
Source: Google Finance
But Tesla isn’t the only way to successfully tap into the EV trend, according to Saldanha, said as other carmakers, such as Volkswagen, produce electric vehicles.
Ironically, for a company whose recent history is tainted with the ‘diesel-gate scandal’, Volkswagen has put in huge efforts over the past few years into developing its electric vehicles range.
Volkswagen’s share price over 5yrs
Source: Google Finance
The German manufacturer did cut its dividend earlier this year after it lost €2.4bn in Q2 when coronavirus forced factories and show rooms to close.
A third FANNGs theme for income investors is media providers, more specifically looking at an income alternative to Netflix.
“While the likes of Netflix would sit outside income investors’ usual hunting ground, there are alternatives such as Comcast, which owns a vast amount of content through its NBC and Sky divisions,” Saldanha said.
“It recently launched a streaming service, Peacock, to compete with Netflix and others. In addition to its impressive content library, the company is also one of the biggest broadband providers in the US.”
By selecting companies which stand to not only take part in these structural trends but benefit from them too, Saldanha concluded: “Investors should be able to build diversified portfolios that fulfil their income requirements over the longer term. At times like these, a focus on resilience and the future should pay dividends.”