Clearly investors should not restrict themselves to the limited opportunity set represented by UK equity income. Rather, they need to expand their income horizons globally across asset classes.
UK investors should consider seeking dividend income outside their domestic market, given the range of compelling opportunities elsewhere. Take the US for example, which is not historically perceived as having the strongest dividend culture. As shown in the chart below, the number of S&P 500 companies increasing their dividends is on the rise. In fact, 52 companies in the S&P 500 have a 25-year record for increasing dividends year-on-year.
And for investors who can extend their horizons to emerging-market dividends, the opportunity is growing there as well. In fact, nearly 800 companies in the MSCI EM index are now paying a dividend.
On a global level, there are currently 372 companies yielding 3.5 per cent or more. In the UK, there are just 37 companies yielding 3.5 per cent or more. In other words, there are 10 times the number of attractive dividend-paying companies globally than there are in the UK.
As another example, in the consumer staples sector, there are only six companies in the UK yielding 3.5 per cent or more, compared with 16 companies globally. In the UK, this sector shows some characteristics of a value trap and is dominated by companies such as Tesco that may have an optically high dividend, but in actuality could be vulnerable to cutting that dividend. Conversely, when we look at the consumer sector across global equities, it tends to be made up of strong multinational companies.
For investors who are ready to think globally, there are clearly compelling reasons to consider diversifying out of the traditional UK equity income sector. For example, income investors can access a range of income-producing assets by investing in multi-asset income funds. These funds expand the opportunity set beyond equities, with the flexibility to seek income-generating investments across multiple asset classes and across the capital structure.
Dividend-paying equities are not the only important source of income in a global multi-asset portfolio. Credit can also provide an attractive yield. For example, high-yield debt currently offers a relatively attractive yield, supported by strong corporate fundamentals and low default rates, and also provides portfolio diversification benefits.
Other examples of more unusual sources of income that can add value in the context of a diversified portfolio include preference shares and convertible bonds. In preference shares, some of the most attractive absolute yields on offer are represented by US banks. Convertible bonds can offer predictable income payments, while the hybrid nature of the asset class also offers asymmetric participation in equity markets. Across all these investments, balance and diversification remains vital.
In today’s tough environment, generating income depends on a broader approach that is more global than ever before. The key to generating a sustainable income stream is not simply to pursue the highest-yielding investments in the absence of considering risk and volatility. It is combining the most attractive risk-adjusted income sources into a global multi-asset income portfolio that pursues the returns that investors need through diversification.
