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UK equity dividends are on track to recover in 2021, but income investors may be wise to seek more diversified ways to pay their monthly bills.

The news that FTSE 100 dividend payments could (almost) regain their pre-pandemic levels by the end of this year will raise a ragged cheer among UK equity income investors. Around half of FTSE 100 companies either cut or suspended their dividends in 2020 as the effects of the pandemic began to bite.
[1] Now, with a projected 36% growth in 2021’s dividends, it may appear that normality is being restored.[2]

This horrific round trip should, however, give pause for thought. To what extent can income investors reasonably rely on single markets or asset classes to pay their monthly bills?

In the case of UK equity income investors, we may not be out of the woods yet. On closer inspection, around 80% of 2021’s FTSE 100 dividend growth will be generated by just 10 companies, with mining companies responsible for the largest dividend increases.  Overall, mining giants Rio Tinto, BHP and Anglo American will provide about 50% of FTSE 100 dividend growth. Meanwhile, just 20 names are expected to account for 73% of all FTSE 100 dividend payments.[2]

Relying on large-cap UK equity dividends therefore brings concentration risk (or fewer eggs in fewer baskets), including high exposure to the mining, oil and financial sectors, all three of which are highly cyclical and sensitive to changes in economic growth. These sectors have done well since November 2020 but, as the recent emergence of the omicron virus variant reminds us, the path to full economic recovery may not be straightforward.

Would investors be better off accessing a variety of income sources from around the world? We certainly think so, and this is the approach taken by the LF Canlife Diversified Monthly Income Fund.

Rather than focusing mainly on the UK, our solution is to look worldwide for reliable income sources from equities, bonds and alternative investments. By increasing the investment opportunities available, we are much more likely to find dependable income streams to provide monthly dividend payments to investors in the fund.

As a side note, all the monthly payments made by the LF Canlife Diversified Monthly Income Fund come from income generated by the portfolio, so investors can be sure that monthly payments will not be eroding their capital.

[1] AJ Bell, Dividend Dashboard, Q2 2020

[2] AJ Bell, Dividend Dashboard, Q3 2021

Important Information

Past performance is not a guide to future performance. The value of investments may fall as well as rise and investors may not get back the amount invested. Income from investments may fluctuate. Currency fluctuations can also affect performance.

The LF Canlife Diversified Monthly Income Fund (the Fund) may invest in property funds that may be illiquid and subject to wide price spreads, both of which can impact the value of the Fund. The value of the property is based on the opinion of a valuer and is therefore subjective.

The information contained in this document is provided for use by investment professionals and is not for onward distribution to, or to be relied upon by, retail investors.

No guarantee, warranty or representation (express or implied) is given as to the document’s accuracy or completeness. The views expressed in this document are those of the fund manager at the time of publication and should not be taken as advice, a forecast or a recommendation to buy or sell securities. These views are subject to change at any time without notice. This document is issued for information only by Canada Life Asset Management.

This document does not constitute a direct offer to anyone, or a solicitation by anyone, to subscribe for shares or buy units in fund(s). Subscription for shares and buying units in the fund(s) must only be made on the basis of the latest Prospectus and the Key Investor Information Document (KIID) available at https://www.canadalifeassetmanagement.co.uk/ 

Canada Life Asset Management is the brand for investment management activities undertaken by Canada Life Asset Management Limited, Canada Life Limited and Canada Life European Real Estate Limited. Canada Life Asset Management Limited (no. 03846821), Canada Life Limited (no.00973271) and Canada Life European Real Estate Limited (no. 03846823) are all registered in England and the registered office for all three entities is Canada Life Place, Potters Bar, Hertfordshire EN6 5BA. Canada Life Asset Management Limited is authorised and regulated by the Financial Conduct Authority. Canada Life Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority.

CLI02001 Expiry on 07/12/2022