The Ian Cowie portfolio: a contrarian approach to the quest for yield

Don’t put all your eggs in one basket, urges our columnist. Dividends do not end at Dover.

Income-seeking investors are among the most risk-averse because we are often near retirement, or in it, and conscious of allocating irreplaceable capital. Now widespread dividend cuts and cancellations may encourage more of us to consider a contrarian approach to the quest for yield.

For example, most investors for whom income is the priority have tended to focus on British funds and shares because of the UK market’s historic emphasis on high dividend distributions. But home bias has hurt total returns recently with London Stock Exchange blue chips including the bank HSBC (LSE:HSBA) (stock market ticker: HSBA), the oil giant Royal Dutch Shell (LSE:RDSB) (RDSB) and the supermarket Sainsbury (LSE:SBRY) disappointing dividend hopes and denting capital values.

No wonder this week’s Association of Investment Companies (AIC) half-term report on how these pooled funds coped with the coronavirus crisis in the first six months of 2020 names not a single UK trust among its top performers. As foreshadowed here last week, the AIC’s leaders since January this year were Baillie Gifford US Growth (LSE:USA) with a total return of 51% since January; BH Macro USD (LSE:BHMU) with 50%; Pacific Horizon (LSE:PHI) with 45%; Scottish Mortgage (LSE:SMT) with 42% and Allianz Technology Trust (LSE:ATT) with 37%.

Digital dominance of American and Asian markets is likely to continue to generate capital gains as the coronavirus causes more people to work from home, earning and consuming online. What is less well understood is how income-seekers might also benefit from investing internationally.

Shrewd analyst Alan Brierley of Investec Securities points out: “Even before the pandemic, storm clouds had been gathering over UK equity income managers who had become increasingly dependent on an ever-decreasing number of stocks and sectors, with dividend cover increasingly threadbare.

“While the sector has been building revenue reserves for a rainy day, a super cyclone has hit. UK dividends are predicted to fall 40% this year and are not expected to recover to 2019 levels for some years, while many companies may choose to rebase dividends at more sustainable levels. Analysts at IHS Markit forecast that even by 2022, UK dividends will be about 23% below 2019 levels. This bleak scenario will impact all UK equity income managers.”

Fortunately, dividends do not end at Dover. As discussed here in May, Henderson Far East Income (LSE:HFEL) gives me access to Asian high-yielders with quarterly dividends currently worth 6.8% that have grown by an average of 4.2% over the last five years.

Against that, HFEL’s total returns of 46% over that period have pushed its share price to trade at a modest 3.3% premium to its net asset value (NAV). So buyers today are paying £1 for less than 97p underlying assets.

Investors willing to accept initially lower income may find better value elsewhere in the AIC’s Asia Pacific Income sector, such as its leader over five years, JPMorgan Asia Growth & Income (LSE:JAGI), which is priced at a 1% discount to NAV, yields 3.7% and delivered total returns of 116%. Similarly, Schroder Oriental Income (LSE:SOI) is priced at a 5% discount, yields 4.5% and returned 47%.

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Those willing to accept higher risks and more volatility can also obtain inflation-busting income in the AIC’s Global Emerging Markets sector. For example, Jupiter Emerging & Frontier Income (LSE:JEFI)is the top yielder here, paying 5.8% and currently priced at a discount of nearly 8%.

No surprise, cynics may say, after the share price ‘total return’ has shrunk by nearly 11% this year. Much worse losses have been suffered at the second highest-yielder in this sector, BlackRock Frontiers (LSE:BRFI), which pays 5.5% and trades at an 8% discount but lost an eye-watering 28% over the last year.

Similarly - albeit not so extremely - JPMorgan Emerging Markets (LSE:JMG) pays 4.3% dividends and is priced at a 10% discount but shrank by 10% over the last year. Such dismal total returns will be enough to put off many income-seekers but I would argue that a diversified portfolio should include some funds and shares that are currently under a cloud.

That’s a mild way of describing the run of bad news being experienced at JEFI where one top 10 holding, the Russian miner Norilsk Nickel (LSE:MNOD), was fined a record $2.1 billion (£1.7) this week for a massive oil spill in Siberia. Subdued economic activity also depressed demand for the metals nickel and palladium, of which Norilsk is the biggest producer in the world.

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On a brighter note, this shareholder draws some comfort from JEFI having just over a fifth of its underlying assets invested in the information technology sector, with more than a third of its money allocated to Taiwan and Hong Kong. While dreams of capital gains can disappear in a puff of smoke - or a profits warning - the discipline of dividends delivers regular reasons with pound signs in front of them for shareholders to keep calm and stay invested.

Ian Cowie is a shareholder in Henderson Far East Income (HFEL) and Jupiter Emerging & Frontier Income (JEFI).

Ian Cowie is a freelance contributor and not a direct employee of interactive investor.

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