It’s no secret that the traditional hunting grounds for income have been eroded by years of rock-bottom interest rates.
Returns on cash have been nothing short of miserable, not even keeping pace with inflation.
In fact, if you’d invested £10,000 in cash a decade ago, today you’d have racked up losses of more than £2,000 in real terms.
And many forms of traditional fixed income haven’t fared much better, with gilts and UK corporate bonds barely keeping up with consumer price inflation increases.
Even dividend income – the trusty, traditional stalwart of UK investors – is a shrinking and volatile asset class.
Dividend growth among UK businesses is the slowest in more than three years as companies struggle with a strong pound and a mediocre global economy.
The latest report from Capita Asset Services’ ‘UK Dividend Monitor’ shows that headline dividends rose by just 1.2 per cent during the second quarter of 2014 – the smallest increase in a quarterly total since 2010.
What’s more, concentration risk means investors shouldn’t rely too heavily on UK dividend income.
This year, for instance, 61 per cent of total UK dividends paid came from just 15 companies, leaving the marketplace dependent on a small number of large companies.
BP provided a graphic example of the pitfalls of this situation in 2010, when the suspension of its dividend alone caused a drop of nearly 10 per cent in the total dividends paid in the UK.
Clearly, investors should not restrict themselves to the limited opportunity set represented by UK equity and bonds. Rather, they need to expand their income horizons globally across asset classes.
On a global level, there are currently 372 companies yielding 3.5 per cent or more. In the UK, by contrast, there are just 37 companies yielding 3.5 per cent or more.
In other words, there are 10 times the number of attractive dividend-paying companies globally than there are in just the UK.
Here’s another example worth considering. In the consumer staples sector, there are just six companies in the UK yielding 3.5 per cent or more, compared to 16 companies globally. In the UK, this sector shows some characteristics of a value trap and is dominated by companies such as Tesco, which recently cut its interim dividend by 75 per cent following an overestimate of its profits.
Conversely, when we look at the consumer sector across global equities, it tends to be made up of strong multinational companies.
Indeed, compelling global dividend yields are on offer in a range of markets around the world.
For example, the average dividend yield on Australian equities (4.3 per cent) currently outpaces that of the UK, Europe and the US.
In today’s tough environment, generating income depends on a broader opportunity set that’s more global than ever before.
The key to generating a sustainable income stream isn’t simply to pursue the highest yielding investments in the absence of considering risk and volatility. It’s combining the most attractive risk-adjusted income sources into a global multi-asset income portfolio that pursues the returns that investors need through diversification.
