Income investors traditionally look to meet their requirements in three areas: fixed income, equities and property, with UK equity income a popular choice for many.
But while the Capita UK Dividend Monitor revealed a record £16.6bn from UK companies in the fourth quarter, the figure was driven primarily by a weakening pound and higher special dividends. With the UK facing the challenge of Brexit negotiations once Article 50 is triggered, it is not surprising some are taking a more global approach to their income search.
The IA Global Equity Income and AIC Global Equity Income sectors both delivered average returns more than twice that of their UK Equity Income peer groups in 2016. The AIC sector averaged 25.6 per cent against the UK Equity Income average of 6.9 per cent, while the open-ended Global Equity Income sector delivered an average 23.2 per cent against the UK peer group average of 8.8 per cent, data from FE Analytics shows.
Nicolas Simar, head of equity value at NN Investment Partners, points out that in 2016 investors increased their risk appetite as global growth improved and oil prices made a sharp rebound.
He explains: “The last months of the year were characterised by hopes of a reflation of the global economy, as the anticipation of a better balance between monetary and fiscal policy resulted in an increase in bond yields and commodity prices and a rise in inflation expectations.”
Mr Simar says that as inflation prospects increased, including a move higher following the US election, the first “small rotation” from bonds into equities took place, and within equities a move from defensive and yield-sensitive sectors towards cyclical groups.
“This rotation was favourable for the high-dividend strategies: most had their best [relative] performance in years,” he says.
“From a style perspective, a change in market leadership seems to have arrived. After years of underperformance, the value style rallied globally and the safe, stable, defensive-quality stocks sold off in the second half of 2016.”
James Davidson, portfolio manager of the JPM Global Equity Income fund, agrees the hunt for yield is entering a new phase, moving away from a narrow list of stocks and shifting focus from defensive dividend yield names to cyclical dividend stocks.
“For the past decade the market has principally been preoccupied with the ‘Dividend Aristocrats’ – companies that could boast a growth in their dividend every year for 25 years or more. The Aristocrats did well for so long as many investors believed there was a risk of deflation, and [these firms] supposedly had pricing power,” Mr Davidson says.
“What really marked the high point for the Dividend Aristocrats trade was that the best-performing sector of 2016 was materials, which had undergone a culling of dividends. Financials, which underperformed consumer staples by about 75 per cent over the past 10 years, have also seen a turnaround in recent months.”
He adds: “Today’s heavily regulated banks, once shunned by the market in favour of the consumer staple Aristocrats, are seeing their costs fall in absolute terms and should be able to offer attractive dividend yields regardless of what happens with rates.”
