With the UK in lockdown, many businesses are going to be struggling in the coming months. If shops are closed, and consumers are not going out, the knock-on effects will be broad.
With the market in panic mode, selling off shares across the board, it is easy to focus on the potential for growth (or the current losses) of shares. But low share prices also bring with them a benefit when income investing. If a company can continue to pay dividends, then low prices generally mean higher yields.
Sector decisions
More so than in normal times, picking the right sector (or avoiding the wrong one) will be key to a good investment. While shares are seeing a sell-off almost across the board, the UK lockdown and coronavirus troubles will only have a fundamental impact on certain sectors.
Clothing retailers, for example, could be hard hit. Aside from having stores closed as non-essential, people do not buy new clothes to sit in their house. The longer the lockdown goes on, the more troubling this will be for clothing retailers. When companies struggle for cash, dividends are at risk.
A potential exception may be sporting clothes retailers, such Frasers Group’s Sports Direct. While in lockdown, exercising is being encouraged (both in the house and once a day outside). If the trend we have seen for exercise motivation continues, sports clothes and running shoes are going to stay in demand.
On a more positive note, I think supermarket giants could be set to benefit. Quarterly and potentially even full-year results are set to be helped by the surge in panic buying in March. Meanwhile as the lockdown will inevitably increase online grocery shopping, big names in the field like Tesco and Sainsbury (who offer yields of 3% and 5.3%) should be strong.
Dividend criteria
With this in mind, there are some criteria to consider for an income investment in these times. Pick a sector that should not be fundamentally hurt by a lockdown. Picking a ‘winning sector’ may be harder, but stay clear of those most likely to suffer (such as airlines).
In addition, the large blue chips are always safer investments in times of trouble. Look at companies with a strong brand and plenty of cash in the bank.
On the more technical front, look for companies that are consistent with their dividend payments. You want businesses that both consistently make enough money to pay investors, and a commitment to doing so. Oil majors, for example, may have other troubles than coronavirus, but they do generally have a history of consistent dividend payouts.
Finally look for a yield above 4%. My normal range would be between 3% and 6%, anything below not being worth it, anything above being too risky. However with the current sell-off these numbers shift to the upside for me. Large sell-offs are likely to bring some high yields into play for fundamentally strong companies. These are the ones to watch out for.
