Downing’s Lynch – Where can UK investors still get income of 4% + p.a?

Whatever your view on quantitative easing, most can agree that the increased liquidity has helped support and appreciate asset prices across almost all asset classes. Whilst capital appreciation is  beneficial, it still leaves the issue of where an investor turns for the income previously provided by their bond allocation. Looking at IA sectors and some of the usual income focused areas, it appears that Sterling Strategic Bonds, Sterling Corporate Bonds, Global Bonds, UK Direct Property and Global Equity Income all currently yield below 4% p.a., with some even closer to 3% p.a.

James Lynch, manager of the Downing Monthly Income Fund comments:

“Investors seeking income turned to equity income specifically from the UK, where the large cap index paid out a record £110.5bn in dividends in 2019, equating to a 4.2% p.a. yield. Six months in to 2020 and the repercussions of the Covid-19 pandemic on the global economy resulted in a whopping 57.2% decline in UK dividends compared to the same period in 2019. The outlook for the rest of 2020 is for the yield on UK large cap equities to come in the range of 3.3% p.a.-3.6% p.a.”

This leads Lynch to question where investors seeking a potentially more appetising yield should look?

“Conceivably it could take until 2026 for dividends to return to the levels seen in 2019. I believe that investors might look outside of the large cap index, where there are still  over 370 UK listed companies currently offering a yield of 4% p.a. or above. This compares to around 30 in the large cap index, offering a diligent investor a far more diverse universe to draw income from.

Typically, UK small and mid-caps are underrepresented in income investor portfolios, despite there being a large pool of high-quality companies with impressive track records of paying growing dividends over the longer term. And the case for income investors to pay greater attention to UK small and mid-caps is strengthened even further when you consider this alongside the compressed yields available in other asset classes.”

Lynch highlights: Chesnara, a life and pensions company which administers over one million policies. Interestingly, Chesnara has increased its dividend for 15 years in succession; Diversified Gas & Oil, which declared a 7% increase to its Q2 2020 interim dividend in August; EMIS, a UK leader in connected healthcare software and systems. EMIS’ solutions are widely used across every major UK healthcare setting including NHS Trusts, GP surgeries and pharmacies. The company has grown its dividend in each of the last 10 years; Lok’nStore, a self-storage developer, owner and operator with track record of growing dividends at compound annual growth rate of 25% since 2008. With a clearly defined pipeline of new stores that we believe will add considerable momentum to sales and earnings growth over the medium term allowing further increases in dividends; and Caretech, which provides specialist social care and education services for adults and children in the UK. The group reported a robust financial performance for H1 2020 and increased the interim dividend to 4.0p; a 6.7% increase on the same period last year.