With banks having cut their dividends along with many other industries, such as housebuilders, some of the traditional sources of dividends for income investors have dried up. According to AJ Bell, the total amount that’s been lost is £24bn.
Industries for income investors
But some industries are holding up better than others. The fast moving consumer goods (FCMG) sector is a good place to look for steady dividend growth and quality companies. Investments trusts are another source of dividends with their ability to retain earnings from previous years. For high dividend yields and share with defensive qualities, the utilities sector is also fertile ground for income investors.
The Association of Investment Companies (AIC) has a list of ‘dividend heroes’ – those that have increased their dividends continuously for 20 years or more.
Leading FMCG companies
I’ll turn my attention now to what I think are some of the leading companies in these industries for investors looking for income.
Within FMCG, Unilever (LSE: ULVR) and Reckitt Benckiser (LSE: RB) are among the biggest UK players. Both typically have higher than average P/E ratios, a sign of their quality and investors being prepared to pay a premium to buy the shares. The P/E ratios now are 19 and 20 respectively.
The companies are investor stalwarts in times like these when demand for their products holds up well. Customers still need to eat and keep their homes clean. Illustrating this point, sales at Reckitt Benckiser rose 12.3% in the first three months of 2020. Reckitt said growth was led by strong demand for many of its hygiene and health products, in particular Dettol, Lysol, Mucinex and Nurofen.
Investment trusts for income investors
When it comes to investment trusts with dividend yields above the average of companies in the FTSE 250, there’s a myriad of options.
If we turn back to the AIC’s list of dividend heroes, we find top of the pile is the City of London Investment Trust (LSE: CTY). It has 50 consecutive years of dividend growth. It still manages to yield 5.5%, which is ideal for income investors. Top holdings in the trust include any of the UK’s most well-known corporations from Royal Dutch Shell to HSBC and British American Tobacco. Also in the top 10 companies are Unilever, GlaxoSmithKline and National Grid.
Other options for income investors wanting to invest in trusts are Murray Income, Temple Bar and Invesco Income Growth. All three of these also happen to trade at a discount to their net asset value.
The last word is on utilities. In the sector, there are a number of higher-yielding companies with slow and steady earnings growth. These aren’t exciting companies, but in a volatile market they tend to hold their value better and keep providing dividends. That’s one of the upsides from having regulated earnings. From the FTSE 100, investors have several companies to choose from. My preference is for National Grid which has a significant presence in the US as well as the UK.
