Funding your retirement income amid low interest rates

16/03/2016

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The good news is we are all living longer.  Advances in medicine and healthier lifestyles have led to an increase in the average life expectancy of both males and females.  Also the number of people about to enjoy retirement is set to grow by 50% over the next 20 years.
 


The bad news is we have to find ways of funding that retirement and longevity.  But low interest rates and bond yields - the traditional sources of income – aren’t sufficient to sustain a proper living.  We think an attractive alternative is equity income.
 
So how does the UK dividend market fare up? Headlines in the newspapers have been recently dominated by news of dividend cuts from some of the biggest names here.  The likes of Rio Tinto, BHP Billiton, Rolls Royce and Barclays have all announced dividend cuts this year.  This can create a large problem for income fund managers so the question remains: how do you find income in the current environment?
 
Firstly it’s important to maintain a diverse portfolio.  One major criticism of the UK market is that it is overly concentrated in terms of income: the top 10 dividend paying stocks represent over 50% of the total market income.  Owning a broad range of companies across a number of different sectors such as pharmaceuticals, telecoms, media and utilities means the Trust isn’t overly reliant on any one sector or company for its dividend; especially helpful given the current pressure on oil & gas and mining companies’ cash flows and dividends.
 
It’s also important to own companies whose business models aren’t necessarily dependant on the economic cycle and hence their income is subject to less volatility.  The likes of tobacco company Imperial Brands, professional publisher RELX, Sky and BT are good examples, having historically paid stable and rising dividends backed by strong cash flows and robust balance sheets.
 
Although there are pressures surrounding dividends in some of the biggest companies in the UK market it’s not all doom and gloom.  Outside the mega cap sectors we are still finding good opportunities for dividend growth.  Two of the companies I own where I expect good dividend growth are Big Yellow and Victrex, the manufacturer of high performance plastics.
 
Big Yellow is the UK’s leading self-storage company with good exposure to London.  With limited space in the capital, demand for self-storage is set to grow rapidly as the population expands.  This structural growth alongside the addition of new sites by the company we hope will drive strong earnings and dividend growth over the medium term.
 
Victrex has been investing to add capacity to fuel new growth opportunities in medical applications such as dental, trauma and knee implants.  This will help drive strong revenue growth over the long term which, combined with the high returns the company make, should significantly increase cash flow and dividends.
 
Finally, one of the major advantages of an investment trust like Henderson High Income is having the ability to use revenue reserves to pay dividends.  Over the last few years the Trust has built up its reserves, putting a little bit of extra income away in the good years to help protect the dividend in difficult years.  Although we are not in the latter scenario yet, having those reserves should give investors’ confidence in the Trust’s dividend over the long term. 

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. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.

Past performance is not a guide to future performance. 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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Please read the following important information regarding funds related to this article.

Henderson High Income Trust plc

Before investing in an investment trust referred to in this document, you should satisfy yourself as to its suitability and the risks involved, you may wish to consult a financial adviser.

Past performance is not a guide to future performance. 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. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change.

Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment.

Issued in the UK by Janus Henderson Investors. Janus Henderson Investors is the name under which Henderson Global Investors Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), (each incorporated and registered in England and Wales with registered office at 201 Bishopsgate, London EC2M 3AE) are authorised and regulated by the Financial Conduct Authority to provide investment products and services. We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

Specific risks

  • Active management techniques that have worked well in normal market conditions could prove ineffective or detrimental at other times.
  • This trust is suitable to be used as one component in several in a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested into this trust.
  • The trust could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the trust.
  • If a trust's portfolio is concentrated towards a particular country or geographical region, the investment carries greater risk than a portfolio diversified across more countries.
  • The return on your investment is directly related to the prevailing market price of the trust’s shares, which will trade at a varying discount (or premium) relative to the value of the underlying assets of the trust. As a result losses (or gains) may be higher or lower than those of the trust’s assets.
  • Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • The trust may use gearing as part of its investment strategy. If the trust utilises its ability to gear, the profits and losses incured by the trust can be greater than those of a trust that does not use gearing.
  • All or part of the trust's management fee is taken from its capital. While this allows more income to be paid, it may also restrict capital growth or even result in capital erosion over time.
  • Some of the investments in this portfolio are in smaller companies shares. They may be more difficult to buy and sell and their share price may fluctuate more than that of larger companies.

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