UK dividends: ii comments on a bleak read for income investors

Our expert sheds light on using investment trusts as a potential alternative for income investing.

The latest UK Dividend Monitor from Link Group is a bleak read for income investors. 

The UK is well-known for its strong dividend paying stocks, but the coronavirus-linked market downturn has resulted in companies scrapping payouts to shareholders worth a staggering £28.2 billion between now and the end of December this year. 

This represents over one third (34.5%) of the dividends Link had expected UK plc to pay over the rest of this year before the outbreak of Covid-19.

interactive investor says dividend paying investment trusts can offer a solution for income investors amid UK plc dividend suspensions.

Dzmitry Lipski, Head of Funds Research, interactive investor, says: “The outbreak of Covid-19 has forced many UK income stocks to suspend dividends to weather what has been a truly unprecedented hit on economic activity across the globe. 

“Unlike open-ended funds which are required to return all income generated to unitholders, investments trusts can retain up to 15% of the income they receive to create an income reserve which they can use to maintain dividend levels on rainy days to keep serving income shareholders through the good times and the bad. It is not raining but pouring from an investment standpoint at present amid the coronavirus pandemic, yet a number of investment trusts have remained resolute to meet their dividend objectives.

“Among these is Murray International (LSE:MYI), which has resolved to pay an additional interim dividend, in lieu of the usual final dividend in light of the postponement of its AGM.

The trust, a conservatively run globally diversified portfolio which targets capital uplift over the long term and above average dividend, has been able to increase its dividend each year for 15 years. It is currently the highest yielding investment trust in the global equity income sector, with a yield of around 5.6%. 

“We also rate the City of London (LSE:CTY) which has pledged to maintain its over 50-year track record of annual dividend growth. Shares in the trust, which principally invests in shares listed on the London Stock Exchange, have a robust yield of 5.7% and pay a quarterly dividend. Job Curtis has been managing the portfolio for 28 years, a length of tenure that is exceptionally rare.

“For those seeking exposure to emerging markets, we like Utilico Emerging Markets (LSE:UEM) which also intends to maintain its quarterly dividend. The trust, which focuses on underdeveloped and developing markets of Asia, Latin America, emerging Europe and Africa, has performed strongly over the long term and has tended to do better in downturns. It currently offers a solid dividend yield of 4.5%.