“In short, these dividends depend on elements very much out of the control of the companies themselves.”
Thomas Moore, equity income trust manager at Abrdn, likewise highlights how it is ‘old economy’ sectors that are among those with high yields within the UK equity market.
“They are traditional cash-generative businesses in sectors such as mining, oil and gas, tobacco, consumer staples, utilities… Ultra-low rates was not a good environment for UK equity income, or any income stocks.
“Although we will see some rate cuts between now and the end of the year in the UK, Europe, and the US, we're talking about 25 basis points here and there. It's not back to 0.1 per cent, and there's no expectation that quantitative easing will start again.
“So in that sense, it's a much more benign environment for UK equity income now compared with five years ago, when QE was happening, and rates were 0.1 per cent. The environment has definitely become more favourable.”
Moore adds: “The best environment for UK equity income would be one where we had stable or improving economic growth, which would encourage investors to buy stocks with some economic sensitivity, which typically the higher yield stocks in the UK market are.”
While the conditions may be more favourable, Clay at Redwheel says a Goldilocks scenario whereby inflation cools, the economy keeps growing and rates return to low levels, has driven a bull market in equities, especially in the so-called magnificent seven growth stocks, which has hampered the performance of income funds.
“Where this Goldilocks outcome proves to be correct, then the headwind would persist,” says Clay. “A move to more cyclical stocks would be required.
“However, if the outcome turns out to be one of a recession, then, again, it should be the more defensive stable companies, those traditional income holdings, that hold up better.”
David Jane, manager of the Premier Miton Cautious Monthly Income Fund, likewise notes that the impact of low economic growth on equity income portfolios would depend on where investors are receiving their income from.
“A more stagflationary economy, where you've got relatively low real growth but relatively high nominal growth, is arguably good for a lot of the sort of stocks that would comprise a typical income fund, but it's not good for some of the others.”
Chloe Cheung is a senior features writer at FT Adviser
