“Couple this operational progress with broad balance sheet strength, and the outlook for dividends looks enticing. But the story does not end there, given the proportion of UK stock market earnings coming from global oil majors, and the UK starts to look a reasonable geopolitical hedge too.”
But despite the “opportunistic appeal” of UK equities, Gutteridge refers to the globalisation of equity income investing as the right strategy.
“International markets offer a greater diversity of dividend sources and faster growing business to support a higher yield tomorrow, not just today,” he says.
“In particular, we would point to the attraction of the technology sector, an economic segment so crucial to future economic productivity, and one enjoying the fastest level of earnings growth too. Unfortunately, the sector is one that is sadly absent from UK stock markets.”
Nick Clay, head of the global equity income strategy at Redwheel, also endorses a global approach to income as the “best chance” of achieving a diversified equity income portfolio.
He cites the concentrated make-up of the UK stock market and the global availability of dividends, with more than half being found in Asia and emerging markets.
“I believe it must be a strategy that is benchmark agnostic, given the concentration in world markets today to the magnificent seven stocks,” Clay says.
However, diversification does not come as a given in a global income strategy, he adds. “It has to be driven by a disciplined process that encourages diversity of business types, investment thesis and that looks to invest in these ideas at attractive valuations.”
Besides geography, another way to diversify is on yield.
Sid Chand Lall, manager of the IFSL Marlborough Multi Cap Income fund, highlights the importance of constructing a portfolio of stocks that is conducive to a “sensible” approach to generating yield.
“Some funds hold a mix of stocks that pay little or no dividend, and stocks that are expected to produce a notably high yield of, say, up to 9 per cent. The idea behind this ‘barbell’ strategy is that a blend of extremes will somehow balance out to produce a solid yield.
“But this approach can come badly unstuck if the high-yielding stocks fall short, presenting a fund manager with a nasty problem. One response is to bank on businesses that promise even higher yields, but this can lead to more disappointment and poorer quality holdings.
“In my opinion, it’s more sensible to avoid extremes and instead invest in a range of companies that yield, say, between 2 per cent and 6 per cent. This should translate into respectable growth and consistent returns over the long term, which is really what equity income funds are all about.”
