David Smith, Fund Manager of Henderson High Income Trust, discusses where he sees the best opportunities for income seeking investors in the UK equity market, and he outlines his recent portfolio activity. David also explains how the Trust invests in resilience companies with strong cash flows to ensure consistent income for shareholders.
Q: Hello and welcome to this latest video update for the Henderson High Income Trust. Today I'm delighted to be joined by the fund manager David Smith. David, thank you very much for joining me today.
So first off what can you tell me about the opportunities for income seeking investors in the U.K. equity market right now?
A: So I think there are good opportunities out there. I mean you look at the dividend yield on the FTSE All Share at the moment at 4.3% that's higher than where we have been at that 20% average. And one of the areas that I have bought into recently is U.K. housebuilders so I bought Bellway; a mid-tier house builder, very conservative management team not trying to grow too quickly more focused in the Midlands in the north where affordability is probably better than where we are in London.
And it's quite an attractive dividend so it's currently paying out 5% dividend yield and that is well covered by the cash flows of the business and also the business has got that very strong balance sheet which is important especially for a cyclical company if times do get a bit tougher in the UK housing market from here.
Q: The Trust has a strong focus on paying shareholders a consistent and attractive income via dividends, but how confident are you that the portfolio companies would be able to pay out during tougher economic conditions?
A: When I look across the across the portfolio, generally when we look for companies we look for good quality businesses. We are always focusing on companies that have good profitability, good strong cash flows and strong balance sheets. So actually when tougher environment comes, invariably it will do, these are the companies that will still be able to pay and grow those dividends in those more tougher times.
We don't always get it right, we do have some of those companies that cut their dividends on us; Vodafone for example for this year cut the dividend on us. But making sure we've got a well-diversified portfolio for our income needs means that we can offset some of the dividend cuts with some dividend growth elsewhere in the portfolio. So even though we had that dividend cut we're still able to grow the revenues this year, still able to grow the dividend this year and also probably still put a little bit away into revenue reserves at the same time.
And let's not forget it's an Investment Trust we do have revenue reserves, around about nine months’ worth of dividend cover as at the end of last year. So again puts the Trust in a good position if the environment for income becomes more difficult from here.
Q: What proportion of the portfolio is in fixed income? How likely are we to see you exercise this capability further and what might make you or encourage you to invest more in fixed income or perhaps take that exposure down?
A: So at the moment actually the allocation towards bonds is around about 20% at the moment. That's increased over the last few years. I think we've recognized that we are in a bit more of a late cycle environment at the moment. So we've increased that defensiveness of the Trust; increase that bond exposure which should be more stable in more difficult times.
Where do we go from here? I feel quite comfortable at 20% and it all really depends on yield levels. So if bond yields were to increase more from here than actually that could be quite interesting given they are at quite low rate at the moment but actually I think equities at the moment equally offer you a good opportunity for dividends and yield potential.
Dividend: A payment made by a company to its shareholders. The amount is variable, and is paid as a portion of the company’s profits.
Yield: The level of income on a security, typically expressed as a percentage rate. For equities, a common measure is the dividend yield, which divides recent dividend payments for each share by the share price. For a bond, this is calculated as the coupon payment divided by the current bond price.
Cyclical stock: an equity security whose price is affected by macroeconomic, systematic changes in the overall economy.