The current situation has brought to light a risk that we have been highlighting for years.
2) Avoid cyclicality
Concentration risk in cyclical and regulated sectors in the UK exacerbates the current situation, making it tough to see things bouncing back quickly for companies in these types of sectors.
In industries that are less cyclical and that have less significant regulatory pressure, we expect to see lower levels of cuts and a faster bounce back.
As visibility improves, we would expect companies in these sectors to pay at a higher level through this crisis and for their dividend levels to bounce back more quickly.
Our portfolio has just 5% invested in the prime cyclical sectors energy and banks, thus we expect to continue to generate a strong income stream going forward.3
Safer dividends can still be found in less cyclical sectors or where companies are able to continue to generate revenues during lockdown, consumer staples, utilities and pharmaceutical stocks for example.
Bucking the trend of cuts, portfolio holding P&G – the owner of brands such as Oral-B, Gillette and Pampers – recently declared an increased quarterly dividend, which represents a 6% increase compared to the prior quarterly4.
3) Look for sustainable, structural growth
Another great protection for those who rely on dividends in this uncertain environment is to generate income from companies with strong balance sheets and long-term structural growth opportunities.
We continue to strongly believe that companies with sustainable income credentials should now become highly prized assets and create an exciting opportunity for income investors.
It is interesting to note too, that the yield pick-up on stocks relative to government bonds is now more compelling than at any time over the past fifteen years.
1 Source: J.P. Morgan Cazenove, May 2020.
2 Source: AJ Bell; Sharecast, consensus analysts’ forecasts, Refinitiv data.
3 Source: Martin Currie, as at May 2020.
4 Source: Company information.
Regulatory information and risk warnings
This information is issued and approved by Martin Currie Investment Management Limited (‘MCIM’). It does not constitute investment advice.
Past performance is not a guide to future returns. Income is not guaranteed and may constrain growth. The return may increase or decrease as a result of fluctuations in the markets, in currency and/or in the portfolio.
The information provided should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the security transactions discussed here were or will prove to be profitable.
As shares in investment trusts are traded on a stockmarket, the share price will fluctuate in accordance with supply and demand and may not reflect the value of underlying net asset value of the shares.
Market and currency movements may cause the capital value of shares, and the income from them, to fall as well as rise and you may get back less than you invested.
The opinions contained in this document are those of the named manager(s). They may not necessarily represent the views of other Martin Currie managers, strategies or funds.