JULIAN LEWIS, CEO of Cavendish Asset Management on UK Income.
The most straightforward argument for why investors should be looking at UK equity income is one can get a higher yield than from more traditional sources of income.
To say this is an unusual situation would be an understatement. For generations, gilts have earned investors more than equities. The primary advantage of equity income has traditionally been one can get a rising income stream, as opposed to the flat income stream offered by gilts. Yet now the situation has reversed, equity income offers both higher yields and a rising stream of income.
Apocalyptic fears as to the global economy prompted a mass flight to triple-A rated sovereign debt, driving down gilt yields significantly. Yet the apocalyptic mood was misplaced: profits in the private sector are returning and yields are back up, hence the present inversion.
This situation will likely remain for the next few months at least, as double-dip fears mean investors remain jittery with regard to equities. Once investors truly regain faith in the global recovery, equity valuations will be pushed up and the relationship between equity and gilt yields will probably return to business as usual. In the meantime, equity income represents a once-in-a-lifetime opportunity for investors. Even then, equity income will remain attractive given interest rates are unlikely to rise in the foreseeable future.
Nonetheless, there are a couple of notes of caution to be sounded. Choosing the right stocks remains paramount; there are a number of companies offering very high yields indeed, around 8%-9%. These should be treated with scepticism given such high yields are usually the province of companies facing a difficult future.
Secondly, one of the major headwinds for equity income will be the prospect of dividend cuts as companies look to pay down their debts or expand.
Julian Lewis, CEO of Cavendish Asset Management, and manager of Cavendish’s UK Balanced fund
