Five ideas to diversify your income

UK Equity Income stocks have suffered in recent weeks seeing prices fall and outflows in June. Adrian Lowcock, investment director at Architas, gives five ideas on how to diversify your income.

Five ideas to diversify your income

In recent weeks we have seen some of the UK’s largest companies and popular dividend-paying shares, such as AstraZeneca and British American Tobacco (BAT), suffer on disappointing news. The impact has, so far, been seen in falls in the share prices of the companies and at present the dividends on these stocks are unaffected.

However, the volatility in a few shares should act as a reminder to investors that the UK Equity Income sector is fairly concentrated with fund managers reliant on a small number of larger payers.

The IA Equity Income sector has also lagged the wider market over the past two years, delivering a total return of 18.32%, versus the FTSE 100 returning 21.68%. In June the investment association reported an outflow of £429m from UK Equity Income funds. AstraZeneca is a top 10 holding in 38 out of the 87 funds in the UK Equity Income sector with an average holding of 4%, while 35 have BAT in their top 10.

UK dividends are concentrated in a handful of sectors including tobacco, pharmaceuticals and oil producers – mature industries for the most part where dividend growth is achieved through cost savings and efficiencies. This concentration of income makes UK investors more vulnerable to stock specific risks and dividends cuts from individual companies.

Five ideas to diversify your income

Think smaller – Although the UK is dominated by large companies paying dividends there are plenty of mid and smaller companies which might look attractive. These companies are often still growing so could offer investors an attractive but growing income. They also offer diversification away from more traditional core UK equity income funds. Idea:  PFS Chelverton UK Equity Income.

Go global – The financial crisis has increased demand for income from investments and there are plenty of companies listed in other countries which have impressive dividend histories. In addition, global equity income offers investors access to income from sectors not readily available in the UK. Also as other countries are growing faster than the UK, investors can access companies with good dividend growth, which can be a significant driver of total returns. Idea: Schroder Global Equity Income.

Property – Commercial property benefits from having different characteristics to shares. The owners of property look to generate a return from the rental income they receive from tenants. Property is split into three main categories: retail, office and industrial. The rents are often linked to inflation so rise as prices rise giving investors an inflation-proofed income. In addition over the longer term property has been an excellent diversifier from shares and bonds. Idea: First State Global Property Securities.

Bonds still offer potential – Bonds continue to have a lot to offer income seekers – in a low interest rate world bonds offer a potentially less risky income than equities. However, with yields so low and inflation having returned, there are risks particularly to capital and it is important to invest in bonds through a flexible manager. Idea: MI Twentyfour Dynamic Bond.

Think long term – As with property, infrastructure is an excellent potential diversifier from equities and bonds. Infrastructure projects tend to be long life, usually multiple decades. They provide a reliable income, often guaranteed by government, which is often linked to inflation. Idea: John Laing Infrastructure fund.

 

Please remember, no news or research item is a recommendation or advice to buy. Every Investor is not responsible for accuracy and may not share the author’s views. If you are unsure of the suitability of any investment for your circumstances please contact an adviser. All investments can fall as well as rise in value so you could get back less than you invest and tax policies may change.

 

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