Dividend finder: identifying better income options

A new AIM dividend survey is a gloomy read, but interactive investor has found some alternatives.

The latest annual AIM Dividend Monitor from global financial administrators Link Group, reflects what a bleak year it has been for income investors. Where does the AIM market fit in for income seekers?

The FTSE 100 dividend yield has been around 4% in recent years. It is currently 4.8%, although how accurate that is given the passing of many dividends is hard to gauge. The FTSE AIM All-Share index is currently yielding of 1.2% and it has only gone above 2% at times when share prices have plummeted.

• AIM dividends to fall by at least a third in 2020
• Where to invest if a second wave of coronavirus strikes

Lee Wild, Head of Equity Strategy, interactive investor, says: “2020 is proving to be a difficult year for income investors with dividend paying companies, both big and small, struggling to maintain payout standards of yesteryear – the AIM market is no exception.

“While the main attraction of the AIM market is the potential of investing in future stars in their budding stage for some potentially serious investment growth, there is a healthy dose of AIM companies that pay a decent dividend and are maintaining or even growing their payout. Granted, the yields aren't stratospheric, but it's not easy finding yields that are both generous and dependable, even on the main market.

“While AIM stocks have the potential to grow faster than their FTSE 100 counterparts, the flip side of that is the yield of the main market companies have in the past offered a higher income stream, due to their cash generation.

“The FTSE AIM big guns, ASOS (LSE:ASC) and Boohoo Group (LSE:BOO) do not pay dividends – the latter even before its embroilment in the scandal over working conditions, while Fevertree Drinks (LSE:FEVR) pays a small dividend (0.7%). But there are some AIM stocks paying healthy dividends.”

Teodor Dilov, Fund Analyst, interactive investor, says: “In the past, income investors might have switched into shares that were perceived to be safer and offer an attractive yield in times of falling dividends, but the coronavirus crisis has seen a number of income stalwart stocks cutting, deferring or even cancelling dividend payouts. Dividends can always be deferred or reduced in difficult times, but this is much more likely to happen at this moment in time.

“Investment trusts can be a useful part of an income seekers portfolio. They have the ability to keep some of the income they receive each year and save for leaner years – and a number have built up long track records they can be rightfully proud of. However, it is important not to become fixated on this. Smoothing dividends is a fantastic tool in the box, but there is a danger – and this applies to direct equities too – that by focussing too much on this, the market could over-react if the dividend approach changes - whether or not it is justified.”

“Having said that, we like Murray International (LSE:MYI), which has reaffirmed its resolved to maintain its ‘progressive dividend policy’ in its first-half 2020 results. The conservatively run globally diversified investment trust targets capital uplift over the long term and above average dividend, has been able to increase its dividend each year for 15 years. It boasts a dividend of around 5.7% and payouts are quarterly.

“We also rate the dividend stalwart investment trust City of London (LSE:CTY), which recently raised its dividend for the 54th consecutive year – despite the multi-billion-pound cut in payouts by UK plc this year as a result of Covid-19 economic disruption. The trust principally invests in shares listed on the London Stock Exchange (LSE:LSE), has a robust yield of 6% and pay a quarterly dividend. Job Curtis has been managing the portfolio for 28 years, a length of tenure that is exceptionally rare.”

interactive investor offers two income focussed model portfolios for individual investors: the ii active income version also has 10 actively managed funds and trusts, and the low-cost option has nine index-tracking constituents.

There are also three growth-oriented portfolios: the ii active growth and ii ethical growth portfolios are each comprised of 10 investment funds and investment trusts, all bar one of which is actively managed. The ii low-cost growth version currently has nine index-tracking funds and exchange traded funds (ETFs).

• Find out more about interactive investor's model portfolios here