It’s no secret that income investors had a fairly torrid 2020, thanks to the Covid-19 pandemic. Spend any time hanging out on online forums where investors discuss this sort of thing, and it’s not difficult to come across people who saw quite startling reductions in their investment income.
And, as I’ve remarked before, UK investors were seemingly hit disproportionately hard — not least, in my view, because of actions taken to constrain dividend payments by the Financial Conduct Authority and Prudential Regulation Authority.
Banks and many other financial institutions, for instance, saw dividend payments banned outright. Other businesses were warned not to make dividend payments if that meant consuming capital that could otherwise be used to bolster the business’s resilience.
Prudent, yes. But also potentially tough on investors relying on those dividends to pay the bills.
Belt-tightening
A recent study from the Association of Investment Companies (AIC) — a representative body for investment trusts and Real Estate Investment Trusts (REITs) — helpfully puts some figures on all this.
Citing Janus Henderson’s Global Dividend Index, the AIC notes that UK dividends fell 41% in 2020, but that dividends globally were only 12% lower in 2020 than 2019.
And, as I say, that 41% cut was painful. 63% of the income investors surveyed by the AIC had to cut back on non‑essential items or activities, for instance. 39% had to change or cancel holiday plans for financial reasons, and 19% had to delay their retirement.
Overall, 87% of income investors were impacted in some way by a loss of income from their investments.
But let’s go back to the UK’s 41% cut in dividend income, versus the global average of 12%. To me, that reinforces the wisdom of a course of action that I’ve previously advocated in these columns: an element of global diversification. This needn’t involve dealing through foreign exchanges or brokerages: plenty of London-listed ETFs and investment trusts offer global and international exposure.
Sit it out — or do something?
The pain hasn’t gone away, of course. By mid-summer this year, the dividend situation was improving markedly, although overall dividend levels were still below those of 2019.
Again, the AIC’s survey panel tells of ongoing pain. 41% of income investors were still cutting back on non‑essential items or activities (down from 63% in 2020), 22% had again had to change or cancel holiday plans for financial reasons (versus 39% in 2020), and 16% had had to delay their retirement (19% in 2020).
Better, to be sure, but far from a full recovery.
Consequently, many investors — 45%, that’s almost half of them — are sitting it out, waiting for better times, and accepting a lower income for the time being.
But others are pursuing a more proactive course of action.
The hunt for income
It turns out that almost a third of income investors (29%) are making portfolio changes as a result of the income cuts of 2020 and 2021. So what exactly have these investors done?
40% have reduced their exposure to investments that have cut dividends. That’s fine as far as it goes, but it could mean taking a capital hit – a lot of those stocks still have share prices below 2019 levels. I think that I’d have been tempted to sit it out, if I could afford to do so.
45% have also moved more into growth investments. Again, that’s fine as far as it goes, but many growth-focused investments offer only a derisory yield, and therefore income. If income is what you’re after, then growth shares are hardly a panacea.
So I’m afraid that I’m with the groups of investors who have pursued two other strategies: first, topping up investments that are more likely to pay dividends (a strategy pursued by 32% of those investors who have been making changes to their portfolio), and second, looking for alternative — and more resilient — income-producing investments. 56% of these investors did that.
So what are these more resilient income-producing investments?
Bonds, in some cases. But although the income from bonds might be resilient, it won’t be much, with bond yields close to historic lows.
UK-focused and globally focused investment trusts, in other cases. The benefit here is decent yields coupled to trusts’ ability to pay from income reserves — most trusts sailed through 2020 with their dividend payments unaffected.
And also investment companies such as infrastructure firms and REITs. In both cases, many of these were also unaffected by 2020 — although not all: REITs exposed to the High Street, say, or to student accommodation, did obviously experience some turbulence.
In short: I’ve said it before, and I’ll say it again. Infrastructure firms and REITs feature large in my own holdings — and while my own income stream wasn’t entirely unaffected by the events of 2020, the hit from Covid-19 was far less than that reported by many other investors.
So it won’t surprise you to find both infrastructure firms and REITs among the ‘Ice’ selections of our investment analysts at Share Advisor.
