“By focusing on businesses with strong financial health and sustainable dividend policies, investors can bridge the gap between forecasted and realised yields, ensuring a more dependable income stream.”
Besides the risk of dividend cuts, Josh Passmore, an investment director at Artemis, highlights the lack of obligation for shareholders to be paid a dividend at all, with equities therefore providing no certainty of income.
He adds: “Likewise plenty of companies, especially less mature ones, have never paid and may never pay a dividend… A resilient, good-quality company [however] should be able to grow its dividend over time.”
When can equities be a better option for income investors?
During periods of economic growth or recovery, dividend-paying shares can provide both income and potential capital appreciation, unlike bonds or cash, says Plant.
On the other hand, bonds or cash might be more suitable during times of economic uncertainty, he adds, when preserving capital and securing a steady income become more important than chasing higher returns.
“Our current expectation for the macro outlook is for a recession to be avoided whilst growth remains positive but not stellar,” Plant says.
“Currently, we think the bond market is fully pricing the path of rate cuts and so additional gains to bond prices from falling yields are fairly limited at this juncture, whereas income stocks offer the potential to deliver returns, as dividends can continue to grow.”
Indeed, David Jane, manager of the Premier Miton Cautious Monthly Income Fund, who runs mixed asset strategies, says: “The reason we hold bonds is not because we believe they will beat equities. It's because they reduce the volatility in the portfolio and add diversification.
“But if you were to look at pretty much all of financial market history, you'll see that dividends grow faster than inflation throughout pretty much every longer period. And equities, in total return terms, typically beat fixed income in the long term.
“So from an income point of view, the purpose of bonds is to build a stack of income in the portfolio. But because the portfolio needs to grow over time, we have to have equities.”
Chloe Cheung is a senior features writer at FT Adviser
