Income investors saw dividends slashed by 44% in 2020 falling to £61.9 billion1 as UK companies battled against the volatile economic conditions brought on by the COVID-19 pandemic. This story was repeated around the world making life harder for income investors already enduring a decade marked by the lowest interest rates on record.
For long-term investors in search of reliable sources of income, two of the go-to asset classes – fixed income and to a lesser extent traditional equities – are no longer so dependable.
As the UK progresses with its vaccine rollout uptake and with business confidence surveys suggesting that we could begin to see the start of a rebound in Spring 2021, what does the future look like for investors searching for a consistent income?
There are early signs that companies are expected to pay dividends again in 2021. That said the overall level is still expected to be relatively low compared to the years prior to the outbreak of COVID-19. Additionally, yields within the fixed income universe remain close to historic lows.
Nearly two-thirds (64%) of IFAs and wealth managers surveyed2 by TIME Investments in late 2020, said as many as 30% of their clients’ portfolios were affected by the decline in dividend payments last year. Interestingly, more than a quarter (28%) of the investment professionals asked said they expect the trend of cutting dividends to continue for another two years.
Yet there are alternatives to traditional stocks and bonds. IFAs report a growing interest in certain alternative asset classes as a source of income for long-term investors2.
A third of IFAs are recommending infrastructure and real estate, while a quarter consider long income property funds to clients in search of income2.
Investors too are showing a growing interest in these alternative asset classes. The Consumer Intelligence survey showed 25% are looking at renewable energy and 15% are looking at real estate to stymie the decline in their income3.
However, ongoing interest in equities and fixed income continues. More than two-fifths (43%) say they will invest in stock markets and 15% will use corporate bonds to replace lost performance, suggesting the potential benefits of investing in real assets still need to be relayed on a wider scale2.
We believe including certain alternatives in a diversified portfolio offers several advantages for those in search of consistent income.
The first is lower volatility. Investment in infrastructure or long income property funds, for example, can provide more consistent returns over a fixed period than equities. For instance, TIME:Social Long Income invests in social infrastructure assets, such as assisted and supportive living facilities, let on long leases to high-quality providers of services. By securing rent rises for the period of the lease, investors can ensure they will receive consistent, inflation-beating income streams. The fund has remained resilient throughout the COVID-19 period, demonstrating the strength of the portfolio and its high-quality counterparties in achieving an income return of 4.38% over the year to 31 May 2021. The Fund also maintains an impressive performance against the IA UK Direct Property sector, outperforming all other funds in the sector over the three-year period to the end of May 20214.
TIME:UK Infrastructure Income invests in companies exposed to essential infrastructure assets with long-term visibility over income streams, such as renewable energy or digital infrastructure. Investors participate in projects with underlying revenues often underpinned by long-term government-backed subsidies or other long-term contracted payments from high-quality counterparties. The fund has delivered an attractive income return over the year to 31 May 2021 of 4.987%.
Alternative income assets can also bring diversification to portfolios since their returns are often less correlated with traditional asset classes. Given the current unpredictable nature of the stock markets and the expensive bond markets, blending assets with low levels of correlation into portfolios can make sense.
There are also often high levels of diversification within the funds themselves. For example, TIME:UK Infrastructure invests in companies exposed to wind and solar energy alongside GP surgeries, hospitals and data centres.
Importantly, investing in alternatives can provide downside mitigation. In other words, the sectors and securities in which the funds are invested are defensive in nature – social housing, educational facilities, renewable energy – and as they are so critical to the UK economy that they can provide relatively attractive returns even when the wider economy is under stress.
The challenges facing today’s income investors are significant but not insurmountable. As the future looks uncertain for dividends and interest rates, there are alternatives to be found in real assets. And accessing these opportunities is straightforward through investment in funds with proven track records.
While not infallible – all investments come with risk and real assets can be illiquid or fall in value – real assets offer notable advantages for long-term income investors battling an unpredictable investment environment.
The value of investments and the income from them may fall as well as rise as a result of fluctuations in market, currency or other factors and investors may not get back the original amount invested. Any past performance data cited is not a reliable indicator of future results.
1 morningstar.co.uk/uk/news/208914/how-bad-was-2020-for-dividend-investors, January 2021
2 Research conducted by Pure Profile among 50 IFAs/Wealth Advisers, September 2020
3 The Consumer Intelligence survey conducted by 1016 consumers, September 2020
4 investmentweek.co.uk/type/digital-edition, April 2021
Posted: 15/06/2021 Categories: Infrastructure, News, TIME:Commercial Long Income, TIME:Freehold, TIME:Social Long Income