CHALLENGES AND POTENTIAL FOR INCOME INVESTING

Update on Income Investing

  • 25 June 2020
  • 5 mins reading time
  • Income investing can include the dividends from shares as well as the coupon payments that bonds generate.

  • We published an article at the beginning of June entitled, “What next for income investing?”

  • That article outlined the challenges facing income investments, our views on where some of the opportunities are and how long we believe the downturn could be for income-generating assets.

  • This is a brief follow-up to take on board the additional points that were made during our 23 June webinar when Schroders income investment specialists, Rupert Rucker and Jonathan Snow, spoke with David Ryder to share their views

How bad is it?

Not as bad as some might think. As Rupert Rucker, Schroders Head of Solutions and Strategic Capability, noted during the webinar, dividends being paid by UK companies were high before the pandemic and lockdown, arguably a little higher than they should have been with the average from FTSE 100 companies being around 4% a year. This has adjusted down to around 3.5%, which is perhaps more realistic for the profits being generated but still higher than the sub-2.0% yields of their US counterparts.

Fixed Income Investment Director at Schroders, Jonathan Snow, added that the cost of hedging (i.e. taking out a form of insurance against unwanted movements in prices or currencies) has dropped to almost zero as a result of the super-low interest rates across much of the more developed economies. The benefit of this for UK investors is that it makes assets in other currencies more attractive because the risk of adverse movements in currency values can be mitigated at very little cost. Broader range of opportunities As a result, a broader range of investments, such as US or EU company bonds, might have become more attractive for a given portfolio. But there are challenges involved in selecting the right assets. As both Jonathan and Rupert pointed out, a good deal of analysis is needed to select shares or bonds that are issued by companies with good cash flows and manageable amounts of debt.

In other words, it’s essential to balance risk and return. Every form of investment, even cash, carries a degree of risk, and that has to be married to the given investor’s circumstances, goals and appetite for risk. Just relying on the broad indications provided by a company’s rating (e.g. “AA” or “investment grade”) isn’t sufficient.

What can investors do?

Assuming that sufficient analysis can be conducted to identify appropriate investments for a given portfolio, Rupert and Jonathan highlighted three elements that could contribute to successful income investing in the current environment:

1. Stay invested

With asset prices moving so sharply both up and down at the moment, Rupert described trying to guess when to buy or sell assets in this environment as being an extremely difficult endeavour. A better approach could be simply to apply the next two factors to your portfolio.

2. Diversify

Despite the general downturn, the total returns on some assets have performed relatively well so far this year. Jonathan pointed out that some corporate bonds have delivered positive returns as the financial stimulus being provided by governments and central banks affords the underlying companies the ability to rebuild their businesses.

Rupert added that some companies could come out of the lockdown period in good shape with less competition to face after other companies might fail to survive.

Knowing precisely which shares or bonds will rise is impossible, so a diversified portfolio could help to mitigate losses and capture gains.

3. Be flexible

A particular company share or bond might pay well in one year but not the next. So, a balance needs to be struck between having an over-arching long-term investment strategy while also affording yourself some flexibility to make adjustments that reflect how things might develop over the coming months. Clients of Schroders Personal Wealth can view the entire discussion by clicking here.

Important information

Any views expressed are our in-house views as at the time of publishing.

This content may not be used, copied, quoted, circulated or otherwise disclosed (in whole or in part) without our prior written consent.

Fees and charges apply at Schroders Personal Wealth.

In preparing this article we may have used third party sources which we believe to be true and accurate as at the date of writing. However, we can give no assurances or warranty regarding the accuracy, currency or applicability of any of the content in relation to specific situations and particular circumstances.

Forecasts of future performance are not a reliable guide to actual results in the future; neither is past performance a reliable indicator of future results. The value of investments, and the income from them, may fall as well as rise and cannot be guaranteed and the investor might not get back their initial investment.

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