In this month’s Ask our Experts, we put this question to Sam Coppin, who runs Tilney’s Investment Advisory Service, and Chris Down, a financial planning director from Tilney’s Exeter office.
Equity income investors have been particularly hard hit in 2020 with typical income stocks underperforming their growth counterparts as many dividend payers shore up their balance sheets by either cutting or suspending payments. UK banks and insurance companies have even been forced by the regulator to halt dividend payments. Whilst the level and scale of these cuts remains uncertain, most commentators expect it to be somewhere between 30-50% in the UK market.
As always, diversification is key and the crisis has highlighted the importance of not relying on the UK market solely as a source of income. European and Asian equity markets have long provided attractive yields (historically around 4%) and whilst the US tends to remain dividend-averse due to its heavy exposure to growth-centric technology stocks, there are still opportunities, even in the technology sector; Microsoft is set to become the biggest dividend payer in the world in 2020. In general, global dividend cuts are expected to be more modest than here in the UK.
Fixed income is another area favoured by many income investors. Unlike equity dividends, the income on bonds cannot be so easily cut and so bond yields have held up relatively well. Tilney’s research suggests that parts of the corporate bond market look attractive from an income perspective currently. A decade of Quantitative Easing had pushed the price of bonds up making them expensive and reducing the yield (which moves inversely to their prices). However, following the recent sell-off, we think yields on investment grade corporate bonds – those with higher credit ratings – look attractive.
Commercial property has perhaps been the hardest hit asset class from the coronavirus crisis and, as I write, the outlook for income and capital values remains uncertain. Those with property holdings however will have continued to receive an income stream, though future rental collection rates are less certain than before.
Infrastructure remains an attractive asset class, particularly those areas with government backed revenues. We expect our funds in these areas to maintain their dividends in 2020 and 2021.
Finally, absolute return, whilst not usually associated with income, offers important diversification characteristics and there is an increasing number of income paying fund options for investors to choose from.
However, we would caution against overreaching for yield. The reduction in dividends from the UK is likely to be a temporary phenomenon, and the crisis provides an opportunity for companies that were overpaying to move to a more sustainable dividend level.
Unfortunately we know that many investors who are reliant on ‘natural income’ have had to dip into cash savings or revert to taking capital from their investments, which is never an ideal solution when markets are at depressed levels.
Different funds carry varying levels of risk depending on the geographical region and industry sector in which they invest. You should make yourself aware of these specific risks prior to investing.
Please note that historical or current yields should not be considered reliable indicators of future performance. For sector and asset specific risks, you can find more specific information here.
One of the challenges of managing finances is knowing the right questions to ask. Financial planning is all about building relationships with clients and helping them to explore what is really important to them and then answering the questions that really matter.
There is no doubt the current pandemic is a time to take stock, and having an experienced and skilled individual to talk to and act as a sounding board can really help with adapting to the new normal.
Most clients fear running out of money. This often means they fail to properly enjoy the wealth that they have worked hard for and end up regretting decisions they could have taken with a coherent, personalised and sustainable financial plan. It is not a crime to spend capital. It can be a very tax-efficient way of funding a lifestyle and what helps to give clients the confidence to do so is testing the likely events that might happen to them to see if the choices they make today will compromise their financial future.
So the right question to pose might be: how can I have the confidence to fund and enjoy my lifestyle while still being sure I can face any challenges the future might hold? This is definitely a question we can answer and for many clients the answer can transform their outlook and bring real clarity to what their wealth can achieve for them and their loved ones.
If you need to draw an income it is really important to ensure that you do so in a tax-efficient manner. One example might be to stop taking drawdown payments from a pension in favour of taking the money from an ISA or investment account. If you are a taxpayer then the pension payments are likely to suffer tax, meaning more of your wealth has to be used to give you the net income you need. Pensions can also be tax efficient for estate planning so leaving money in the pension and spending other wealth could benefit your family as well in the long run.
We are all having to adapt to the impact the pandemic is having on our lives. The health and family implications are very obvious. In just the same way as we are being encouraged to review our social behaviours, so now is the time to take stock and review our financial plans, seek help and ensure we respond to the new world we are living in.
Would you benefit from speaking to a professional about your investments and financial plans? We offer free initial consultations to give you the opportunity to speak to Tilney about your circumstances and goals. We can’t give you advice during these consultations but we can provide information and also explain Tilney’s services and how we could help you. You can book a free consultation online or call us on 020 7189 2400.
This article does not constitute personal advice. If you are in doubt as to the suitability of an investment please contact one of our advisers.