87% of income investors impacted by the pandemic.
More than four fifths (87%) of income investors have been impacted by a loss of income in their investments due to the pandemic, according to research from the Association of Investment Companies (AIC) conducted by Research in Finance.1
In the AIC’s survey, more than a quarter of income investors (28%) reported a ‘considerable’ or ‘big’ impact to their portfolios. However, this is down from 41% last year highlighting the improving outlook for income investors.
Fewer than one in ten (9%) income investors have had to re-think their future plans or lifestyle in response to dividend cuts, down from 17% last year. Of these, 41% have had to cut back on non-essential items or activities (down from 63% in 2020), 22% have had to change or cancel holiday plans for financial reasons (39% in 2020) and 16% have had to delay their retirement (19% in 2020).
What changes have income investors made to compensate for the loss of income?
(Base: those who have changed plans or lifestyle)
Source: AIC/Research in Finance.
However, a positive outlook is emerging from the majority (91%) of income investors who haven’t yet had to change their plans or lifestyle. Of these investors, 40% believe they won’t have to make changes even if businesses continue to pay lower dividends. A further 30% say they could maintain the same lifestyle for three years before any changes would need to be made.
In the second quarter of 2021, global dividends grew 26% year-on-year but remain 7% lower than pre-pandemic levels according to Janus Henderson’s Global Dividend Index.2 UK dividends fell 41% in 2020 and dividends globally were 12% lower in 2020 than 2019.3
Portfolio changes to compensate
Almost half (45%) of income investors who have been impacted by dividend cuts are accepting a lower income for the time being, while 29% have made changes to their portfolio to address the loss of income.
Zooming in on the 29% who have made changes to their portfolio, 56% of this group have looked for different income-producing investments such as investment companies or bonds, almost half (45%) have moved into growth investments, 40% have reduced exposure to investments which have cut dividends and 32% have topped up investments more likely to pay dividends.
What changes have income investors made to their portfolios?
(Base: those who have made changes)
Source: AIC/Research in Finance.
Increasing use of investment companies
Almost a fifth (19%) of income investors who do not currently use investment companies are considering investing in them in the next 12 months. The most commonly cited reason was the reliability of investment companies’ dividends. Investment companies can reserve up to 15% of their income each year to distribute in a future year, allowing them to smooth dividend increases over time. This allowed 85% of income-paying investment companies that invest in equities to increase or maintain dividends in 2020, compared to just 23% of equivalent open-ended funds.
Existing investment company investors are expecting to invest more in investment companies over the next year, with 38% planning to do so, up from 29% last year. Reliable dividends was again one of the most common motivations.
The proportion of investment company investors who cited the ability to smooth dividends as one of investment companies’ main benefits increased from 51% to 58% over the past year, indicating a wider appreciation of how dividend smoothing has delivered for investors over the pandemic. Many investment companies, such as the dividend heroes, have built up long track records of consistent dividend growth.
Annabel Brodie-Smith, Communications Director of the Association of Investment Companies (AIC), said: “Although dividends haven’t fully recovered from the pandemic, it seems the outlook is brightening for income investors. Fewer investors are experiencing such a big impact on their portfolios and fewer are having to make hard choices to compensate for the loss of income. Unfortunately, some investors are still having to cut back on everyday luxuries, cancel holidays or even delay retirement, but most now feel they won’t have to change their lifestyle even if businesses continue to pay lower dividends.
“Investment companies’ income advantages have clearly been important for investors over the past year. Both investors who already invest in investment companies and those who don’t are expecting to invest more in investment companies over the next 12 months, with reliable dividends a key reason for doing so for both groups. Investment companies’ ability to use a revenue reserve, invest in a wider range of income-generating assets and use capital profits to top up dividends has helped investment companies deliver income when investors needed it most. It’s good to see more investors benefitting from these advantages.”
What investors say about the impact of the pandemic on their investment income:
“My frustration with the pandemic has been that my plans for that have clearly been put on hold for the last two years. I am working on the basis that my life is ticking away and I want to be spending more of it and enjoying myself.“
“Dividends definitely seem less reliable than they used to be. In the past, dividends can go down, and then they go back up again. But, generally speaking, you have always had some kind of a dividend. But this time the dividends have been completely cancelled. It does make you think how reliable are dividends.”
“The falls were massive. Five years gains or more were wiped out and I went into a loss particularly the shares. Most of them have recovered now.”
Several interviewees are happy to appear as media case studies. For more information, please contact the AIC communications team.
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Notes to editors
- Dividend cuts or fund suspensions had affected 87% of income investors: a little impact – 59%, a considerable impact - 24%, a big impact - 4%.
- Source: Janus Henderson Global Dividend Index, August 2021. Percentages are headline dividends which include special dividends.
- Source: Janus Henderson Global Dividend Index, February 2021. Percentages are headline dividends which include special dividends.
- The research was completed by Research in Finance on behalf of the AIC between 7 June and 5 July 2021. The research consisted of an online survey of 402 private income investors, 205 of whom used investment companies and 197 who did not, and in-depth telephone interviews with 10 of the investors, half of whom used investment companies and half who did not.
- The Association of Investment Companies (AIC) was founded in 1932 to represent the interests of the investment trust industry – the oldest form of collective investment. Today, the AIC represents a broad range of closed-ended investment companies, incorporating investment trusts and other closed-ended investment companies and VCTs. The AIC’s members believe that the industry is best served if it is united and speaks with one voice. The AIC’s mission statement is to help members add value for shareholders over the longer term. The AIC has 361 members and the industry has total assets of approximately £266 billion.
- Disclaimer: The information contained in this press release does not constitute investment advice or personal recommendation and it is not an invitation or inducement to engage in investment activity. You should seek independent financial and, if appropriate, legal advice as to the suitability of any investment decision. Past performance is not a guide to future performance. The value of investment company shares, and the income from them, can fall as well as rise. You may not get back the full amount invested and, in some cases, nothing at all.
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