Looking beyond the UK for income

As the search for income goes on in this low interest-rate environment, financial advisers and their clients continue to flock to the investment company sector. This is understandable, since closed-ended funds offer income seekers key advantages – notably the ability to build up reserves that can be used to smooth out dividend payments, and the option of paying income from capital.

But where, specifically, are you looking for investment companies offering good levels of income? The answer for many advisers will be the UK Equity Income sector – fair enough, but maybe it’s now also time to look further afield.

Figures published this week by the asset manager Janus Henderson reveal that the total amount of dividends paid by companies around the world totalled $244.7bn during the first quarter of the year. That was an all-time record.

The data is a reminder that the UK is not the only game in town when it comes to dividend income. And right now, it certainly doesn’t look to be the best game.

Several analyses published in recent months have highlighted the relatively low dividend cover of leading UK companies, and questioned their ability to sustain dividends at current levels, let alone increase them. We may already be seeing that play out – Link Asset Services’ recently-published UK Dividend Monitor described dividend growth in the first quarter of the year as “disappointing”.

Investors in UK Equity Income investment companies will be sheltered to some extent from a slowdown in dividend growth, thanks to those structural advantages of closed-ended funds. Nevertheless, the generous pay-outs from companies in other global markets highlighted by Janus Henderson should be a prompt to consider a wider range of sectors. The Global Equity Income and Global High Income sectors are a good place to start – both offer a choice of funds offering attractive yields generated from portfolios of international equities.

This isn’t to suggest turning your back on the UK Equity Income sector, which will continue to be a mainstay of many investors’ income-generating portfolios. But building more international exposure into such portfolios makes sense from a diversification perspective, as well as in the context of the seemingly better prospects for dividend growth that overseas markets now offer.

These include both developed and developing markets. Janus Henderson points out that the US and Canada both generated record amounts of dividends during the first quarter. But its analysis also notes that the value of the dividends paid out in emerging markets during the first three months of the year grew by a third compared to the same period of 2017.

The implication of these figures is that it now makes sense to widen the search for income. While traditional sources of yield may remain appealing, there’s a compelling case for spreading your bets with overseas exposure.

Still, why stop there? To return to the structural advantages of the investment company sector, the fact that closed-ended funds have the option of paying income from capital means almost any fund can choose to offer an attractive yield, even if its portfolio generates no income at all. Don’t assume you need to stick to income-focused sectors as you plot a diversification strategy.