For financial professionals in the UK

Generating income in the new normal

Ben Lofthouse, CFA

Ben Lofthouse, CFA

Head of Global Equity Income | Portfolio Manager

28 Feb 2022
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The Henderson International Income Trust (HINT) celebrated its 10th anniversary in 2021, marking the end of an eventful decade, culminating in the coronavirus pandemic. However, as we have witnessed time and time again, dividends tend to be far less volatile than earnings, and HINT has grown its dividend annually throughout the period. This paper looks at how profits and dividends have performed over the last two years and explores the nuances that have led to the divergence in performance between sectors and regions. It then explores how the Henderson International Income Trust managed by Portfolio Manager Ben Lofthouse, navigated the fallout caused by the pandemic and how it’s adapting to the “new normal” to provide investors with a stable and sustainable income.

Historically, dividends have played a crucial role for investors and their total returns. A company that is growing over time may provide capital gains through share price appreciation. However, a company’s ability to grow its dividend has become increasingly important to investors. In fact, dividend paying stocks have helped investors grow their portfolios by leading market returns over the long term.

Thanks to the power of compounding, dividends reinvested can significantly enhance investors’ returns from equities. For example, the price return of the MSCI World Index ex UK was 191% over the 10-year period to December 2021. While this might be impressive, with dividends reinvested that figure climbs to 269%. This is also evident across different indices (as shown in the table below) highlighting that dividends reinvested is one of the most powerful tools available for boosting returns over time.

As we have witnessed, including in the most recent 2020 pandemic year, dividends tend to be far less volatile than earnings. In tough times, especially when companies view the hit to profits as temporary, they generally look to shelter their dividend from the full negative impact they are experiencing on earnings. Therefore, dividends can perform a crucial role in protecting portfolios in down markets, as they can prove an important source of returns.

A look back in time

Overall, dividends proved relatively resilient during 2020 as the world grappled with a COVID-19 induced recessionary shock – dividends fell substantially less than earnings. With lockdowns weighing on economic activity, global profits slid 24%, but dividends were only 8% lower.2 Almost 60% of companies saw their earnings slip, while around a third of firms slashed their dividend.

The picture, however, was far from uniform, with significant geographical and sector variation. For instance, UK and European dividend payouts fell the most, while the US, Canada, China, and Hong Kong registered year-on-year gains. Meanwhile, from a sector perspective, the resources sectors such as oil & gas struggled as oil prices plunged, with the global economy coming to a standstill. On the other hand, technology companies increased their dividends: demand for goods and services rose as many workers adapted to working from home, and there is often no need for physical locations when selling and interacting with customers. With dividends holding up far better than earnings, dividend cover also took a hit in 2020..

Global earnings backdrop

While global profits fell by nearly a quarter over 2020, there was a sharp divergence from a regional and sector perspective. Europe ex-UK profits were down by around 40% while UK company earnings dropped by a hefty 80%.2 Japanese profits, meanwhile, were broadly flat in sterling terms. Asia Pacific ex-Japan also held up much better than the global average, with the earnings of Chinese and Taiwanese companies advancing to record highs.

Most of the regional variation in dividends and profits can be attributed to relative coronavirus infection levels and the responses of the local authorities. For example, in the UK and continental Europe, governments responded to elevated and accelerating coronavirus case levels with more draconian lockdown restrictions. Elsewhere, the US authorities opted for looser restrictions, despite similarly high infections rates, while the Asia Pacific region was helped by lower case levels.

Dividends prove more sticky

Global dividends proved more resilient than profits in 2020, registering just one-third of the fall that earnings did during the year. North America even saw a modest rise in dividends over 2020, with the US supported by higher dividend payouts in its technology sector. In Japan, dividends were flat, mirroring the country’s earnings. Meanwhile, dividends in Asia fell by 5.6% in 2020, markedly less than the decline witnessed across the rest of the world.[i] Although dividends fell sharply in the UK and Europe ex UK, the magnitude of the fall, was significantly less than their declines in profits.

Along with technology, the classic defensive sectors – utilities, healthcare, and consumer basics – all generated dividend increases globally over 2020. In contrast, dividend payouts in the consumer discretionary sector plunged 32%, by far the most significant decline in dividends globally, as industries like autos, retail and leisure were hit by dramatic falls in activity levels and profits. Basic materials and oil, gas & energy were the next worse affected, down 24% and 18% respectively, a factor that drove down the UK’s relative dividend performance given its significant weightings in these segments. Finally, financials, traditionally a good place for dividends, saw a 23% decline in payouts globally.ii Banks faced regulatory limits and even outright bans on their dividend payouts in Europe, the UK, Singapore, and Australia as the respective authorities fretted over their banks’ capability to weather the pandemic.

Dividend cover

Dividend cover, the ratio of a company’s income to its dividend payment, indicates how sustainable a company’s dividend is. A dividend cover ratio above one means profits are higher than dividends and shows companies are retaining cash for future investment in growth. Conversely, a ratio of less than one for an extended period means firms’ dividends are unsustainable, and they will likely need to cut payouts in the future.

As corporate profits declined much more significantly than dividends during 2020, global dividend cover slid – to 1.8x in 2020 versus 2.2x in 2019.ii While this is a typical phenomenon during a recession, with dividends being less volatile than profits, it brought dividend cover to its lowest level since the 2008 financial crisis.

Dividend cover fell in nine of the top ten paying countries. Within this group, only Australia saw dividend cover rise – due to the absence of large special dividends from mining companies versus the 2019 comparative. Looking at the leading industry sector groups, dividend cover dropped the most in the oil sector, which booked significant losses in the year. However, dividend cover fell in every industry group, as companies generally acted to protect their dividends from the worst of COVID-19’s impact on their bottom line.ii

The lessons of 2020

Unquestionably, the coronavirus pandemic underlined the unpredictability of markets and life. So, what should investors take away from the experience?

Significant divergence in earnings and dividends across sectors and geographies points to the importance of diversification. Being overly invested in one sector or region at the beginning of the pandemic would have led to more extreme investment outcomes. Indeed, countries can be heavily skewed towards specific industries and even individual companies, potentially magnifying the thematic impact for investors.

Concentration risk was a significant factor in the dividend performance of individual countries during 2020. This was especially the case in the UK, Australia, and Spain, where prior to COVID-19, the five largest dividend payers were responsible for between two and three-fifths of the payouts by their respective listed companies. Compare this to the situation globally, where the top five payers made up less than one-twentieth of the total.

The global economy contracted by 3.3% over 2020 as the pandemic and the related restrictions took a severe toll.iii However, certain regions and countries were much more impacted than others, with the UK and Europe ex UK being among those areas worst affected. This further highlighted the importance of diversification; from both an earnings and dividend standpoint, UK and European investors would have fared far better from being globally diversified rather than solely invested in their home markets.

Diversification is key

Henderson International Income Trust (HINT), managed by portfolio manager Ben Lofthouse, is a diversification play for UK investors seeking income and capital growth from a portfolio of securities outside the UK. HINT was launched in 2011 with the diversification needs of UK investors in a low-interest rate environment very much at heart. The income portfolios of UK investors are often overweight to UK FTSE dividend payers: the dividends received tend to be highly dependent on the fortunes of a relatively small number of UK-listed companies. This is far from the case with HINT’s portfolio, which offers true diversification to domestic investors through access to regions and sectors less well represented in the UK equity income universe. The portfolio is split into three areas: North America, Europe, and the Asia Pacific, with none representing more than 50% of assets. In addition, to ensure that the portfolio is not overly exposed to one specific company, no one stock represents over 5% of the portfolio at the time of investment. The flexibility to invest in these regions across different sectors provides the investment team with access to the best opportunities globally. In addition, it enables the team to take advantage of the short to medium trends in various markets/sectors whilst remaining positioned to benefit from innovation unfolding over the long term.

Reliable and stable dividend growth

HINT has a significant track record of dividend growth – it has grown its dividend every year since its launch in 2011. What’s more, the dividend has increased at a rate greater than inflation in every given year. Despite the volatility and disparity in global dividends over the past year or so, the Trust’s dividend increased by 5% year on year.6 With the exception of 2020, when coronavirus hit corporate profits, a proportion of the income received has been reserved each year since the Trust’s inception.

Undoubtedly, 2020 highlighted the unpredictability of markets/life and also the importance of a stable and sustainable income to investors. Earlier this year, HINT’s board reviewed the dividend policy and, considering the preferences of current and prospective shareholders, concluded that investors would benefit from by receiving a greater proportion of the Trust’s total return through an enhanced dividend. As such, the board increased the fourth interim dividend by 20% to 1.80p per share for the quarter ended 31 August 2021.

In the event that dividends are not covered by underlying revenues, the board will utilise distributable reserves – a key feature of investment trusts – to ensure that investors achieve their investment goals. The Trust’s ability to use reserves to smooth income through the cycle should provide investors who rely on income received from their investments with confidence surrounding future distributions.

This new policy reaffirms the boards’ commitment to income through the cycle and should provide investors with additional confidence that they rely on future distributions at a time when other asset classes are experiencing record low yields. From a relative return standpoint performance versus the Trust’s MSCI World ex UK index, the past couple of years have been challenging: growth stocks have significantly outperformed value against the backdrop of ultra-loose monetary policy. However, with value and income strategies having significantly lagged the market, now could be an opportune time for investors to put greater emphasis on dividend strategies. Value appears cheap on a historical basis, while there seems ample scope for a recovery in dividends as we move through the cycle, a factor that should naturally attract more investors to the higher dividend-paying stocks.

Dividend resurgence

While profits were slammed last year, the earnings recovery has been strong. Following the abrupt 24% fall in 2020 – which took corporate profits to their lowest point since 2016 – profits have been rebounding at a rate of knots this year.ii However, the rate of earnings improvement is somewhat uneven across the world, with both the varying progress on vaccination campaigns that allow economies to reopen and relative sector weightings of respective markets coming into play.

Though dividends fell markedly less than earnings during 2020, the expected rebound in dividend this year has been to a lesser magnitude than the recovery experienced in earnings. At the same time, the regions and countries that suffered the steepest dividend cuts in 2020 should register the most significant recoveries in payouts, together with those heavily exposed to the mining and banks sectors. However, dividends should overtake their pre-pandemic peak by the end of December 2021, envisaging headline dividend growth of 15.6% this year. Third-quarter 2021 dividend trends were particularly encouraging, with 90% of companies globally either raising or holding their dividends steady.i Looking forward, dividends are also expected to grow in 2022 and 2023.

Dividend cover should also improve, buoyed by the strong upturn in profits that has been underway this year. As a result, dividend cover is forecast to rebound to 2.1x this year versus 1.8x in 2020. Looking into 2022, the picture looks even brighter – dividend cover is expected to increase by 2.4x – its highest level since 2013.ii

Nevertheless, there is still some uncertainty in the market, with factors such as rising inflation, central bank tapering, and Covid variants unsettling investor sentiment. Having now celebrated its 10th anniversary, the Trust has navigated what has been a turbulent and tricky landscape: the US has entered a new phase in its relationship with China, the UK has left the EU and latterly, the world has had to face up to the rigours of the coronavirus pandemic. Despite this backdrop HINT investors have seen their income rise every year since the Trust’s inception. Therefore, investors should remain confident that HNT will not only provide diversification by geography and sector but will also utilise the investment structure to ensure that investors receive a stable and consistent income.

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i Janus Henderson Global Dividend Index Edition 32

ii Source: Henderson Far East Income – Asia Pacific Dividend Index 2021

iii Source: Janus Henderson Global Dividend Index Edition 29

iiii Source: International Monetary Fund – World Economic Outlook: Managing Divergent Recoveries, April 2021

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.


Past performance does not predict future returns. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.


The information in this article does not qualify as an investment recommendation.


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