When Vodafone cut its dividend last week we were reminded once again of the danger of investing in a single company, simply because it has a high dividend yield.
At almost 9%, the income that could be earned from Vodafone's shares may have looked highly attractive to many investors, especially as the new chief executive, Nick Read, had pledged to maintain the company' payout in November last year.
However, the level of dividend was more to do with the share price falling than profits increasing:
the company has had a number of headwinds in recent times including the high cost of 5G investment, high levels of debt and fierce competition. And its because the company share price fell considerably between April 2018 and 2019, that the dividend yield shot up.
Roll-on just six months, and the mobile giant – one of the UK's largest dividend payers – cut its dividend by around 40%. It was the first cut for the company since it introduced a dividend payout in 1990.
So is the first of more dividend cuts to come from other British firms? The Chelsea research team think not. “There are always companies cutting their dividends,” said Darius McDermott, managing director, “it's just that Vodafone is a big name.
“Thankfully there are also companies growing their dividends. The key is to make sure you have a good mix in your portfolio of stocks that pay a good level of dividend and stocks that are growing their dividends and good stock selection is key.”
British companies have historically been a popular choice for UK investors wanting to produce an income from their investments: our companies have long history of returning money to shareholders and the dividend yield of the UK stock market has almost always been more attractive than other area of the world.
Diversification of dividends – as for all types of investment – is important to make sure your portfolio is not too reliant on any one holding.
For those investors wanting to stick to homeland companies, the Chelsea research team suggest multi-cap income funds that invest in companies of any size and are able to combine higher paying stocks with dividend growers in their portfolios.
Examples on the Chelsea Selection include Royal London UK Equity Income and Marlborough Multi-Cap Income.
The Royal London fund invests in high yielding UK stocks, but importantly has an emphasis on companies that generate significant free cashflow to be able to sustain their dividend payments. The Marlborough fund has a bias towards small and medium-sized companies as the managers believes this area of the market offers an attractive combination of growth and income.
However, dividend opportunities are not just UK-centric. There are around 2,500 dividend-paying companies of a reasonable size around the globe – ten times more than when limiting the universe to just the UK. As Baillie Gifford's James Dow said recently: “That's the equivalent of conducting an orchestra with only a brass section; when you go global, you have the full orchestra.”
Investors looking for a region with an equivalent yield level to the UK could consider Asia or Europe. Schroder Asian Income, Guinness Asian Equity Income and BlackRock Continental European Income are all options on the Chelsea Selection. The first two invest in the whole Asia Pacific region, including Australia, so benefit from the mix of companies from both emerging and developed countries. The European fund invests in large and medium-sized companies across the continent.
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Darius's views are his own and do not constitute financial advice.