Have dividends lost their power to impress?
IA is reinstating yield criteria for equity income sectors but they remain widely unloved
The Investment Association has just reinstated the yield criteria for the UK equity income and global equity income sectors. It is a sign of better health for the two sectors, as companies once again have the confidence to make distributions to shareholders. However, the sector remains widely unloved. Have dividends lost their power to impress?
The inclusion of equity income in a portfolio used to be a no-brainer for investors. There were impressive statistics on how dividends had contributed to total return – the Barclays Equity Gilt Study, for example, showed that £100 invested in equities in 1899 would now be worth £2.7m; strip out dividends and that falls to under £20,000.
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Has the alternative income story run its course?
Scarcity of yield has caused a lot of capital to chase relatively few assets and left valuations stretched
Investors won’t need reminding that 2020 was a dismal year for income strategies. Yields on fixed income remained pitifully low, while dividends were sliced. This prompted many investors to roam the market looking for alternative sources of yield. However, this too has created problems, with a lot of capital chasing relatively few assets.
The popularity of alternative income options has been most evident in the investment trust sector, where many are housed. In 2020, existing investment companies in the Renewable Energy Infrastructure sector raised more than £1.3bn, bringing its total to £7.7bn over the past five years, ahead of any other sector. The strongest individual fund raises were Hipgnosis and Greencoat UK Wind, at £426m and £400m respectively. Investors have been drawn to the combination of strong yields and the