Income investing: Barely surviving or actually thriving?

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Newton’s Ilga Haubelt asks: Which income stocks held their own in 2020 and which are best placed to shine in the coming year?

Ilga Haubelt, leader of Newton’s¹ equity income team, examines which income stocks coped best with 2020 and explains why she believes the coming year presents investors with a once-in-a-lifetime opportunity to buy income stocks at attractive valuations.

• Dividends were cut in 2020 but many companies are now reinstating them.
• A cyclical rotation at the end of Q4 lifted stocks best-exposed to a post-pandemice conomic upturn.
• Having cut dividends in 2020 many companies are well placed to offer sustainable payouts from this point onwards.

It’s been the worst of all times for so many people on so many fronts. When we’ve not been worried about public health we’ve been worried about our jobs; when we’ve not been worried about the spectre of global unemployment we’ve wondered what on earth has been happening with our political and cultural norms. It’s been a time of slim-pickings and stress; of challenge and slow recoveries. A long-haul where what we thought was light at the end of the tunnel so often turned out to be a false dawn.

For income investors too, 2020 was something of an annus horribilis. Dividends were among the first casualties of the economic upheaval in March. Plummeting share prices, a dash for cash and fears of a global depression meant even well-established companies cut their forecasts and went on the defensive. No wonder the tech darlings of the world – particularly those that seemed best suited to our new normal of home-working and home-schooling – took investors’ cash in droves.

And yet, as the dust settles on what has to have been the strangest year of our lives, we might ask a question: Is it time for income stocks to reclaim their place in the sun?

The question’s a pertinent one since, according to Ilga Haubelt, leader of Newton’s equity income team, some income stocks have done more than just hold their own in recent months – they’ve actually done rather well.

In many ways, 2020 was worse for dividends than the Global Financial Crisis since companies cut pay-outs not just for financial reasons but often as much out of social and regulatory concerns,” she says. “In our portfolio, for instance, clothing company Inditex was one of the first to cut dividends: they felt it was wrong to offer pay-outs while at the same time being obliged to lay off workers because of the downturn. It was a similar story with insurance companies and banks in the portfolio except in their case they were following the lead of regulators who’d asked them not to pay dividends.”

A cyclical rotation

But now, as encouraging news on the roll-out of vaccines begins to come through, the story is beginning to change. “Given the specific nature of this pandemic, management teams have more visibility as to when the recession will end,” observes Haubelt. “As more people are vaccinated we can begin to look ahead to brighter times – and that should mean a much faster reinstatement of dividends than after previous recessions. Already one third of European companies announced during the last earnings season they would either reintroduce or consider reintroducing dividends in 2021.”

Haubelt notes it was this kind of optimism that lifted risk appetite across the board in the fourth quarter of 2020 and provided a shot in the arm for cyclical equities most sensitive to economic reopening.

In line with this, companies in the industrials, metals and mining, automobiles, banking and energy sectors saw some of the biggest gains from this rotation – but higher beta sectors, such as insurance, also benefited.

The change in mood music was also reflected in the Global Income portfolio. It meant gains for trade-fair company Informa, for instance, as investors began to see a clearer path to a full resumption of live shows. Also in the consumer area, Swiss watch and jewellery group Richemont climbed, after the company reported a marked improvement in sales.

In the banking sector too, the fund’s relatively new holding in US financial services firm Citigroup performed well, with the company comfortably passing the US Federal Reserve’s December stress test, which should, in the income team’s view, lead to share buybacks at some point in 2021.

A unique opportunity

Looking forward, Haubelt believes current market conditions present investors with a unique opportunity not only to buy income stocks at the right price but also to do so on a more sustainable dividend yield. “It’s a great time to buy income stocks that have been trading cheaply versus the broader market,” she says. “You could almost say it’s a once-in-a-lifetime opportunity. Certainly, within the income team we’ve initiated positions in companies that have long been on our watch list but which, until recently, have been out of reach on valuation grounds. Just as importantly, with dividends having been cut in 2020, we can look forward to more sustainable pay-outs to investors from this point forward.

BNY Mellon Global Income Fund

Five year performance %

Objective: To provide income together with long term capital growth (5 years or more). The Fund targets a dividend yield in excess of the yield of the FTSE All-Share Index on an annual basis as at the Sub-Fund’s financial year end. There is no guarantee that the Sub-Fund will achieve its objective over this, or any other, period.

Benchmark: The Fund will measure its performance against the FTSE All-Share TR Index as a comparator benchmark (the “Benchmark”). The Fund will use the Benchmark as an appropriate comparator because it is representative of the UK equity market. The Fund is actively managed, which means the Investment Manager has discretion over the selection of investments subject to the investment objective and policies disclosed in the Prospectus. While the Fund’s holdings may include constituents of the Benchmark, the selection of investments and their weightings in the portfolio are not influenced by the Benchmark. The investment strategy does not restrict the extent to which the Investment Manager may deviate from the Benchmark

¹Investment Managers are appointed by BNY Mellon Investment Management EMEA Limited (BNYMIM EMEA), BNY Mellon Fund Management (Luxembourg) S.A. (BNY MFML) or affiliated fund operating companies to undertake portfolio management activities in relation to contracts for products and services entered into by clients with BNYMIM EMEA, BNY MFML or the BNY Mellon funds.

Risks

Past performance is not a guide to future performance.

The value of investments can fall. Investors may not get back the amount invested. Income from investments may vary and is not guaranteed.

Objective/Performance Risk: There is no guarantee that the Fund will achieve its objectives.

Currency Risk: This Fund invests in international markets which means it is exposed to changes in currency rates which could affect the value of the Fund.

Geographic Concentration Risk: Where the Fund invests significantly in a single market, this may have a material impact on the value of the Fund.

Derivatives Risk: Derivatives are highly sensitive to changes in the value of the asset from which their value is derived. A small movement in the value of the underlying asset can cause a large movement in the value of the derivative. This can increase the sizes of losses and gains, causing the value of your investment to fluctuate. When using derivatives, the Fund can lose significantly more than the amount it has invested in derivatives.

Concentration Risk: A fall in the value of a single investment may have a significant impact on the value of the Fund because it typically invests in a limited number of investments.

Charges to Capital: The Fund takes its charges from the capital of the Fund. Investors should be aware that this has the effect of lowering the capital value of your investment and limiting the potential for future capital growth. On redemption, you may not receive back the full amount you initially invested.

High Yield companies risk: Companies with high-dividend rates are at a greater risk of being able to meet these payments and are more sensitive to interest rate risk.

Counterparty Risk: The insolvency of any institutions providing services such as custody of assets or acting as a counterparty to derivatives or other contractual arrangements, may expose the Fund to financial loss.

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