The hunt for income is on. Dividend sustainability at some of the largest firms on the FTSE 100 is in doubt as profits waver and future revenue streams remain unclear, also sending share prices tumbling.
UK equities shed 5.7%* of their value in the first few weeks of 2016 and global markets dropped 4.9%**. China isn't improving, Japan sentiment is mixed, emerging markets are heavily indebted and more US interest rate rises loom.
Faced with these kinds of falls, investors must remind themselves to consider total returns, which include income as well as share price movements, and try to avoid panicky sell-offs that could result in large capital losses.
That said, with commodity giants such as Anglo American and Glencore having already suspended dividends for the 2016 financial year and several of the major supermarkets trimming payouts, total returns are under pressure.
Earning equity income is looking increasingly challenging, so where can investors turn for decent returns?
Sticking with UK shares
Despite new year market jitters, there's no need to abandon your share portfolio completely to secure a steady income stream. Plenty of companies have posted healthy dividends over the past year and there are some stand out funds that have a strong track record of consistently maintaining payouts. Elite Rated Rathbone Income has increased its dividend in 22 of the past 23 years, for example. Quite an astonishing record.
Investors' preference for income is clear looking at UK fund inflows and outflows for the six months to 31 December 2015. UK equity income funds saw net inflows of around £3.05bn^ whereas UK all companies funds saw a comparatively measly £1.04bn^^ in net inflows.
In the UK equity income sector, Woodford Equity Income saw the most money invested over the period with gross inflows of £1.74bn^. The fund is Elite Rated by FundCalibre and it also delivered the sector's highest total returns to investors over the period at 6.1%^^^.
That said, the Henderson Global Dividend Index for the quarter ending 30 September 2015 suggests our dividends are lagging other developed markets. Henderson notes many of the FTSE's smaller companies are in fact posting strong dividend growth, but says the amounts are simply too small to significantly impact our ranking when compared to global peers.
Locally, though, growing dividends among small and mid-cap companies are an area worth watching. Total returns from the FTSE 100 in 2015 were -1.3%†. The FTSE 250, however, paints a rosier picture with 2015 total returns of 11.2%†.
Elite Rated funds seeking to take advantage of this smaller company growth include Standard Life Investments UK Equity Income Unconstrained, which currently has a 42% holding in market cap terms in the FTSE 250††††, and Marlborough Multi Cap Income, which is also heavily weighted to small, medium and micro cap stocks.
Exploring US and Euro options
Globally, the total amount of dividends paid out in 2016 is expected to grow 2.4% in US dollar terms, led by American companies, according to the Henderson index††.
The US posted its seventh consecutive quarter of double digit dividend growth in the three months to end September with every sector except mining and tobacco increasing its payout††.
Europe, like the UK, saw some high profile cuts, and dividends paid fell from 20% of the world's total a year earlier to 17% as of end September, when measured in US dollars††. Although, Henderson stresses that when measured in local currency, Eurozone dividend growth was actually quite strong.
In European markets, the BlackRock Continental European Income is Elite Rated by FundCalibre.
On the flip side, China, which has become the world's 10th largest payer of dividends, was set to see payout falls for the first year on record in 2015 as the economic slowdown hits corporate profits††, Henderson says.
Alex Crooke, Head of Global Equity Income at Henderson, commented that stark geographical discrepancies in dividend payouts were yet another reminder to investors of the importance of taking a globally diversified approach to income investing.
Going further afield
Areas of Asia are also attracting attention at the moment; Jupiter expect to launch an Asian Income fund for ex-Newton manager, Jason Pidcock, before the end of March 2016, for example.
The Jupiter fund will invest in listed companies throughout the Asia Pacific excluding Japan. Being in this area is not with geopolitical risk, although Jason says the fund will aim to avoid countries where the state or religions can cause unpredictable disruptions to business.
Indeed, as it currently stands, the fund's model portfolio has a 38% allocation to Australia††† – a country the Henderson index says has been a generous dividend payer in the past due largely to its banks, although there are some concerns the profits that have previously enabled this are at risk from capital requirement changes in the industry.
The top performer in the global income sector over the six months to 31 December 2015 was Newton Global Income, also Elite Rated by FundCalibre. It delivered total returns in pounds sterling of 9.7%*** over the period.
FundCalibre has Elite Rated an additional two global equity income funds: Artemis Global Income and Legg Mason IF ClearBridge Global Equity Income.
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' views are his own and do not constitute financial advice.
*Source: FE Analytics, FTSE All Share 31 Dec 2015–26 Jan 2016, accessed 27 Jan 2016
**Source: FE Analytics, MSCI World, 31 Dec 2015–26 Jan 2016, accessed 27 Jan 2016
***Source: FE Analytics, accessed 28 Jan 2016
^Source: FE Analytics, UT UK All Companies inflows minus outflows, 6 months to 31 December 2015
^^Source: FE Analytics, UT UK Equity Income inflows minus outflows, 6 months to 31 December 2015
^^^Source: FE Analytics, UK Equity Income funds, total returns in GBP, 6 months to 31 December 2015
†Source: FE Analytics, FTSE 100 and FTSE 250 total returns in GBP, 31 Dec 2014–31 Dec 2015, accessed 28 Jan 2016
††Source: Henderson Global Dividend Index, Edition 8, November 2015
†††Source: Jupiter, Asian Equities fund factsheet
††††Source: SLI UK Equity Income Unconstrained factsheet, correct as at 30 November 2015