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Andrew Milligan OBE

Searching for income in the downturn

By Andrew Milligan
5 minute read

For investors reliant on income, the current economic outlook appears bleak. Where should they look for yield?

Many newspapers talk about investors as a single group, when of course we’re all different in terms of our approach to risk, our time horizons or the ultimate objective from our savings. Some investors will have been reassured that, after the global stock market fell by well over 30 per cent in a single month, it then snapped back by over 20 per cent within just a few weeks – their wealth was damaged but not too badly. 

But, for another group of investors, dark clouds are looming on the horizon. This group needs income. This may be because they have retired, or perhaps because they are trustees of a charity or pension scheme. Or, they may have to meet definite payments such as care home fees. Here the news is more concerning.

The usual income sources are drying up
Clearly the effects of the coronavirus on the world economy, including lockdown efforts in many societies, are causing considerable damage to businesses. In an effort to stay afloat and stabilise their balance sheets, companies are cutting back on expenditure, whether labour, rents, interest on loans or, in many cases, dividends and share buybacks. The news is changing day by day but, on balance, about one-third of all dividends paid out by companies in the UK and the rest of Europe have either been cut or suspended. The total yield from dividends looks to be between 30 per cent and 50 per cent lower than it was a year ago. Indeed, financial markets are pricing in potentially an even grimmer outlook, with the dividend swaps market indicating a 60 per cent peak-to-trough decline.


Central bank rate cuts don’t help 
From an income perspective, the situation has of course been exacerbated by the rapid actions of central banks to prevent an economic recession turning into a depression. Official interest rates have been reduced to as close to zero as they can be. Hence, the yield on government and even many investment-grade bonds is rarely more than 0.5 per cent to 2 per cent for “blue-chip” issuers.

For some, not such an ill wind
How should investors respond to this situation? There are some themes to explore, albeit with careful analysis. Many sectors are under considerable pressure, such as banks, energy companies, travel operators and high-street shops. Even so, there is a wide array of companies that private investors and professional fund managers can trawl through. These are in sectors where trading is sufficiently good to allow firms to retain their dividends. Indeed, a few companies have been expanding their dividend payouts via special dividends, on the back of exceptional trading.

Reliable dividend payers
Just as the technology-related “FAANGs” group of growth stocks (Facebook, Apple, Amazon, Netflix, Google), is popular with some investors, so others will focus on good dividend payers. Sectors such as insurance, healthcare, utilities, food and beverage, pharmaceuticals and telecoms include many companies that have historically paid attractive and reliable dividends. Following recent rate cuts, such stocks look even more attractive, given the “relative yield” argument – that is, the gap between their dividend yield, even if moderately reduced, and the very low yield from fixed-income bonds.

Looking further afield for dividends
A second theme is to look for global dividend providers. The UK market provides about one-third of the total value of European dividends. The US market is renowned for having a low dividend yield, with share buybacks the preferred way of returning surplus cash to shareholders. However, given that buybacks may be less forthcoming for the foreseeable future, there are many opportunities in Japan and among the Asian emerging markets which can also be explored.

One important consequence of the pandemic is that it will affect different economies in different ways and at different times. Therefore, a more active approach is warranted.

Divided fortunes
A third area to research is real estate and alternatives. Of course, many parts of the property world are suffering from the effects of the economic lockdown, notably high-street retail and entertainment. By contrast, other areas such as logistics and infrastructure are either unaffected or, indeed, thriving. Home delivery has never been more popular – many companies are rapidly ramping up their capabilities!


Alternative investments such as private equity, private credit and, in particular, infrastructure with its long-term income stream are also worth exploring. While such areas do suffer from lower levels of liquidity, the counterpart is a higher yield.

The importance of active management
Highly active stock selection is clearly the order of the day in such specialised areas. For example, while the US Federal Reserve has provided a backstop for parts of the high-yield corporate bond market, the depth of the downturn means it cannot prevent a surge in defaults in coming months. Energy-related companies look especially vulnerable, given the collapse in oil prices and bleak demand outlook.

Active asset selection, detailed analysis – the way ahead
To sum up, before the crisis, any investor looking for income would have searched for a mixture of fixed-term bank accounts, high-yielding corporate bonds, equity dividends and commercial property. Some of those areas have been removed from the equation, such as interest from banks. Other areas need handling much more carefully, such as lower-quality bonds or parts of the real estate market.

The stark reality is that a crisis as significant as COVID-19 will have a material effect on economic activity and financial wealth, resulting in lower yields for some years to come. We need to reset our expectations. Nevertheless, private investors, charity trustees, pension fund administrators and professional investors will still find a universe of dividend-paying stocks, investment trusts, and bonds with attractive yields to research – all against the backdrop of lower inflation. The important themes rely on active asset selection and detailed decision-making, with an emphasis on balance sheet strength, cash reserves and available liquidity during what will be an exceptional period for the world economy.

Andrew Milligan OBE, head of global strategy, Aberdeen Standard Investments

Searching for income in the downturn

For investors reliant on income, the current economic outlook appears bleak. Where should they look for yield?

Andrew Milligan OBE
Andrew Milligan OBE
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