Why you shouldn't put all your (income) eggs in the UK basket

Many investor portfolios are skewed towards providing a consistent income to meet their everyday needs. Dividends are a welcome reward for showing faith in a company and can be distributed in a number of ways – monthly, quarterly or annually for example – while others may choose to re-invest their dividends back into the fund or funds they have invested in.

For more than a decade following the Global Financial Crisis, income investors had only a handful of options. However, the rising interest rates we’ve seen in the past couple of years have seen the bond markets return to normal, and investors can now generate 4% or more in income by simply buying a gilt*. The UK has traditionally been a hotbed for dividend-paying companies and has always had a number of star fund managers with strong track records to justify investing – you can easily achieve an income of 4.5-5% from a UK income fund at the moment.

This environment gives equity income a different role in a portfolio. Rather than just providing a high yield, an equity income portfolio now also needs to deliver income growth, diversification, and the potential for capital gains.

The UK can certainly remain the cornerstone of any portfolio, but the need for additional income streams is paramount. For example, dividend concentration, and the risk of this becoming too high, is often overlooked. The top five dividend payers (AstraZeneca, Shell, British American Tobacco, Vodafone and BP) in the UK accounted for almost half (48%) of total dividends paid out in the first quarter of 2024 (the top 15 actually accounts for 81%)**.

All it takes is for one of these companies to decide not to pay a dividend for a period of time – it would have a significant impact on many income portfolios.

With this in mind, here are a few alternative income routes for investors to consider.

Please remember that the value of investments will fluctuate and returns may be less than the amount originally invested. Tax treatment depends on your individual circumstances and tax rules can change. Chelsea does not offer advice and so if you are unsure of anything please contact an expert adviser.

Asian Income

Asia is often thought of as a growth market, but it can play an important role for income investors in this new landscape. There are almost 10,000 dividend-paying companies in Asia ex-Japan***, accounting for roughly 12% of global dividends (double the amount offered in the UK)****. Perhaps most surprising of all is that 70% of Asia’s long-term equity returns have historically come from dividends – not growth^.

Dividends tend to be lower in Asia on a company-by-company basis, but from growthier companies. Add in the growing middle class and increased wealth in the region and this number is likely to grow. It also gives access to different types of income themes, such as tech stocks TSMC and Samsung. Most importantly of all, significant progress has been made on corporate governance in numerous countries, with a view to offering shareholders greater income returns.

The first fund is Guinness Asian Equity Income. Managed by Edmund Harriss and Mark Hammonds since its launch in 2013, this fund is different because it invests in 36 companies, and each position is equally weighted. This, together with their one-in, one-out policy, means there isn’t a long tail of smaller holdings, so each stock can make a meaningful contribution to performance. The managers favour well-run companies that have fallen out of favour in the short term but have historically shown an ability to perform in both good and bad economic environments. The fund has an historic yield of 3.35% and has returned 30.5% to investors in the past five years^^.

Another option is the Schroder Asian Income fund. This fund gives equity investors access to the higher growth Asian economies, excluding Japan, but including Australia and New Zealand. The fund has been run by Richard Sennitt since 2001 and invests in 60-80 companies, the majority of which are currently larger firms worth over £3bn. The fund has an historic yield of 3.95% and has returned 36.5% in the past five years^^.

European Income

The European region includes a diversified mix of developed, high-income economies, and is home to around 700 million people. Europe has gone through a turbulent time since the 2008/09 banking crisis, both politically and economically. However, due to its diversity, size and exposure to the global market, Europe has navigated this period better than some less developed regions.

Europe delivered exceptional double-digit dividend growth in 2023 as stronger European currencies and large special dividends, from the likes of Volkswagen, Equinor and Moller-Maersk, boosted growth^^^. The total dividend paid broke through the $300bn barrier with all-time highs in France, Germany, Switzerland, Italy, Norway, Denmark and Austria^^^. Almost a third of all growth came from banks, but it was ably supported by industrials, vehicles, oil producers and healthcare.

One option from the Chelsea Selection is BlackRock Continental European Income. Manager Andreas Zoellinger identifies undervalued stocks that offer sustainable dividends, potential dividend growth and inflation protection. He works with the 20-plus strong European equity team to undertake individual stock analysis. He looks for companies with good management, a strong competitive position and good financial discipline. Andreas will actively manage the portfolio to find a balance of companies with large but secure dividends, and those able to grow dividends faster than the average company. The fund has consistently performed well, returning 44.9% in the past five years, with an historic yield of 3.68%^^.

Going Global

Those who are not sure which markets to use to find diversified sources of income might prefer a global equity income fund. These funds allow the managers to invest actively across the various regions to find the right balance of income and growth. They often have strong exposure to the US, the world’s largest market, but can switch direction as and when opportunities arise.

JPM Global Equity Income is a core equity income fund. It has a value tilt and will invest globally – including in emerging markets – in large to mega-cap stocks. Managers Helge Skibeli, Sam Witherow and Michael Rossi aim to achieve a superior yield, without sacrificing growth. With the aid of a huge global team of analysts, they filter down the whole global market to a portfolio of 40-90 stocks. The fund has returned 77.6% in the past five years, with a dividend yield of 2.22%^^.

Managed by Ben Peters and Chris Elliot, the IFSL Evenlode Global Income fund invests in quality companies with three characteristics: asset-light business models; high barriers to entry which can't be disrupted easily; and their customers' decision to buy their product or service should not be determined completely by price. Its largest holdings include the likes of Microsoft, Nestle and L’Oréal^^^^. It has returned 37%^^ in the past five years, with a dividend yield of 2.15%^^.

*Source: UK 10 Year Gilt, MarketWatch at 18 June 2024
**Source: computershare.com, Q1 2024
***Source: Matthews Asia
****Source: Janus Henderson Dividend Monitor, May 2024
^Source: Schroders, 16 February 2023
^^Source: FE fundinfo, total returns in sterling, 17 June 2019 to 17 June 2024
^^^Source: Janus Henderson Global Dividend Monitor, Q4 2023
^^^^Source: fund factsheet, 30 April 2024

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. The views expressed are those of the author and fund managers and do not constitute financial advice.