Six ways to invest in an inflationary environment
UK inflation rose to 9% in April, its highest level in 40 years and almost double the rate the Bank...
It’s been a difficult few years for income investors. After a decade of record low interest rates, both cash and bonds have been paying out little in the form of income. So investors were forced to look further up the risk spectrum to equities – only for company dividends around the world to suffer huge cuts at the height of the pandemic.
According to the Association of Investment Companies (AIC), this has led to a change of lifestyle for around 10% of income investors who have been impacted by a loss of income in their investments*.
Research, conducted by Research in Finance on behalf of the AIC, showed that while the survey had shown an improvement on the precious year, of these 9% of income investors that had to re-think their future plans or lifestyle in response to dividend cuts, 41% have had to cut back on non-essential items or activities, 22% have had to change or cancel holiday plans for financial reasons and 16% have had to delay their retirement*.
(Base: those who have changed plans or lifestyle)
Source: AIC/Research in Finance.
The good news is, that dividends have recovered at quite a pace.
Janus Henderson’s latest Global Dividend Index** shows that 2021 saw global dividends recover very strongly, more than making up for the cuts made during the worst of the pandemic in 2020.
“Records were broken in a number of countries, including the US, China and Sweden though growth was fastest in those parts of the world that had seen the biggest declines in 2020, especially Europe, the UK and Australia,” the report said.
“More than one-quarter of the $212bn annual increase came from miners which benefited from soaring commodity prices,” the report continued. “They delivered record payouts, almost twice the previous high in 2019, with BHP becoming the world’s largest dividend payer.
This is backed-up by other recent announcements from the likes of Anglo American, Rio Tinto and Glencore.
Iron ore, one of Anglo’s key products, saw its price rise almost 50% in 2021, as did copper and aluminium. This has allowed the company to deliver record profits and cash returns, with a final dividend of more than $2 billion.
Mining giant Rio Tinto went one better and was able to deliver the second largest pay out in FTSE 100 history. The company announced a special dividend which, along with the final dividend and the interim dividend already declared, took the total pay-out to investors to almost $17 billion.
A quarter of the overall dividend increase was also delivered by companies restarting payouts paused during 2020, according to Janus Henderson. “Most of this was due to the banks, whose dividends jumped by 40%, or $50.5bn, reaching a level just one-tenth lower than their 2019 peak,” it said.
Again, this good fortune has continued into 2022 with Barclays shareholders having been promised £2.5 billion of capital returns after the company posted strong results last month.
BlackRock World Mining is a specialist trust offering exposure to mining and metals companies globally. In addition to investing in quoted securities, the trust may also invest in royalties derived from the production of metals and minerals, physical metals and unquoted securities. It also offers an attractive dividend yield to investors.
Managers Evy Hambro and Olivia Markham covered how the trust generates an income in this recent podcast, as well as discussing what they call the “multi-decade period of strong demand for commodities”.
This trust aims to provide a high and growing income combined with capital growth by investing in a portfolio of 30-70 UK companies. It is conservatively managed, targets resilient companies which can thrive in any economic scenario, and has grown its dividend for investors for almost 50 years.
In a recent update, manager Charles Luke said that holdings Standard Charted and BHP had been among the trust’s largest positive contributors, with the latter “performing well due to rising commodity prices and also buoyed by the unification of the London and Australian listings.”*. The trust also has Rio Tinto and BP among its largest equity holdings***.
Launched in 1891, City of London is one of the longest-running investment trusts in the UK. It aims to provide growth in income and capital by investing predominantly in larger UK companies with international exposure. It has increased its dividend payment every year for the past 55 years.
Manager Job Curtis, who has been at the helm for more than three decades, has Shell, HSBC, BP and Rio Tinto among his top ten holdings***. He spoke to us at length about BP’s dividend and the potential windfall tax in a recent video interview.
Launched in July 2005, this trust’s investment objective is to provide income and capital growth, primarily through investment in equity and equity-related securities of Asian companies, which offer attractive yields and growing dividend payments.
Manager Richard Sennitt currently has almost 17% of the company invested in Australia – which along with the UK was a big contributor to global dividend growth in 2021**. Among the trust’s top ten holdings are BHP Group, Rio Tinto and National Australia Bank Ltd***. The latter is one of the big four Australian banks that have consistently ranked as amongst the highest-yielding shares on the Australian stock market.
*The research was completed by Research in Finance on behalf of the AIC between 7 June and 5 July 2021. The research consisted of an online survey of 402 private income investors.
**Source: Janus Henderson Global Dividend Index, March 2022
***Source: fund factsheet, 31 January 2022