Siddarth Chand Lall, manager of the Marlborough Multi Cap Income fund, talks about how, despite the economic impact of the pandemic, robust and well-managed companies are continuing to pay attractive dividends and explains where he is finding opportunities across the market cap spectrum.
Has UK equity income changed forever?
There has certainly been a change in the dividend landscape in the immediate term, with a company such as Royal Dutch Shell dropping its dividend for the first time in its history and BT suspending its annual dividend for the first time since it was privatised in 1984.
What the crisis has done is underline the risks of relying on a limited pool of large-cap dividend payers. It reveals that their dividend policies are not as reliable as many investors might have imagined.
It's important to remember though that UK equity income is not just about the FTSE 100. In our fund, we hold a diversified portfolio of companies, with 120 holdings selected from an investable universe of more than 700 stocks spread across the market cap spectrum. Of those 120 stocks, only 35 have cut their dividends.
We have a bias to small and mid-cap stocks and we continue to find very interesting dividend-paying companies outside the FTSE 100.
Are there particular sectors where dividends are holding up well or does it tend to be more about individual companies?
The fact that one oil major, BP, continues to pay dividends, while another, Royal Dutch Shell, has cut, highlights that often it is about individual companies and their management, rather than sectors.
While we hold BP, we had sold out of Royal Dutch Shell before the dividend cut.
Some sectors will perform better than others during the crisis. We believe technology and telecoms companies may be big beneficiaries, with remote working resulting in increased demand for broadband, server technology and videoconferencing facilities.
There may be some companies that still cut dividends, perhaps where their management were never really committed to them, but we expect others to honour their commitments.
A good example is Zegona Communications, which is one of our holdings. It is listed in the UK but is essentially a shell that owns more than 20% of Spanish telecoms provider Euskaltel. It is benefiting from increased telephone and data usage. Zegona has confirmed it will continue to pay its dividends.
We also hold Euskaltel separately and it too has reconfirmed dividends. On 1 June, Euskaltel's rival Masmovil received a takeover approach from private equity groups KKR, Cinven and Providence Equity Partners.
On the flip side, there are sectors which have been hard hit, but where individual companies are continuing to pay their dividends. For example, while property companies generally have been suffering, the Supermarket Real Estate investment trust has benefited from a very specific focus on supermarkets and distribution centres. It has maintained its dividend policy and we added to our holding in a recent placing.