UK interest rates have been on hold since March 2009, resulting in poor returns for risk-averse investors.
Similarly, the yield on 10-year UK government bonds has fallen to 3.2% and yields on corporate bonds have nearly halved to 4.7%.
Many income-seeking investors are turning to UK equity income funds. The UK equity market, represented by the FTSE All Share, currently offers a dividend yield of 3.3% and the potential for future dividend growth.
Investors choosing equity income in today’s low interest-rate environment have been amply rewarded. The Equity Income sector rose 23% in 2009 and has made further progress so far this year.
However, UK equity income investors have also suffered. Dividends were cut throughout 2008 and 2009 as firms sought to conserve cash and replenish balance sheets.
Against this backdrop, can UK equity investment really be an attractive source of income?
Certainly, the LV= UK Equity Income fund is expected to deliver a yield of over 4% this year, over a 20% yield premium to the equity market.
Equity valuations are also attractive in an absolute and relative sense, partly as the outlook for the UK’s international stock market has been confused with the outlook for the domestic economy.
We continue to identify companies with a sustainable competitive advantage and can earn cashflow returns ahead of the cost of capital. We back management teams who have been good allocators of shareholders capital and we expect such firms can deliver strong cashflow and therefore dividend income for shareholders.
Mira Bhogaita is fund manager, UK equities, at LV= Asset Management
