In its latest sector review, the group noted that dividend cover had fallen sharply in recent years and there had been an increasing number of high profile dividend cuts. Equally, the search for yield has fuelled many years of outperformance by ‘quality defensive’ stocks, which had led to high valuations.
To date, the UK equity income closed-end sector has performed strongly, delivering attractive, growing and sustainable dividends a key feature, said the group. The report added: “These dividends have been accompanied by some impressive capital gains, with long-term NAV and shareholder total returns comfortably ahead of the FTSE All Share and open-ended funds. Given recent changes in the pension industry, we believe these companies have an integral role to play within long-term income strategies.”
The report also noted that UK equity income yields continue to be attractive relative to other asset classes, but added that the compression of the yield gap over the broader market should give investors ‘a degree of caution’.
The report’s authors’ Alan Brierley and Ben Newell said profitability and cash-flows in many areas of the market were coming under pressure and that some companies may find it difficult to pay dividends in future. They pointed out that dividend cover has fallen from 2.7x to 1.6x over the past five years.
The group also announced a change to its model portfolios. It is retaining a buy rating on the Perpetual Income & Growth trust, but has removed it from its model portfolios on the grounds of concentration risk – Edinburgh Investment Trust is also a constituent – and potentially higher fees.
