24th November 2010
Schroders, the global asset manager, believes that "there is significant potential for dividend growth over the next three years" among such sectors that, furthermore, equity income funds are an effective way to mitigate the negative impact of inflation on retirement income.
Following the first market wide dividend cut in decades some of the most attractive sectors for medium and long-term dividend growth, such as banking stocks, are currently not paying out. But Schroders is confident they will produce returns in the next three years. Banks, of course, have been under considerable pressure from governments around the world to focus first and foremost on repairing their balance in the wake of the financial crisis, as this Guardian article illustrates.
As a result it recommends investors focus on stocks with depressed dividends and the potential to grow.
Rising inflation is set to present investors with challenges, especially those focused in incomes like retirees. This will be exacerbated further with the cost of living set to increase markedly in 2011.
Recent research from Schroders reveals that there is a £160 billion retirement income gap with the average annual expenditure in retirement exceeding income by a third. As a result, some £23 billion of savings and investments has already been used in the last 12 months to try to fill this retirement income shortfall.
At the level of the individual, a recent study, as reported on by EveryInvestor, suggests some parts of society are facing a retirement savings gap of £7,500 per year. The average gap across the population stands at £3,216 with incomes only expected to reach £15,577.
Over six million investors already depend on dividends from stocks and shares for additional income in retirement. However, Schroders warns that there remains an over-reliance on cash-linked investments, with around £880 billion in savings accounts and ISAs.
Robin Stoakley, managing director, Schroders UK Intermediary Business said: "The threat of rising inflation is a major issue facing investors, particularly those nearing or already in retirement who need to maximise their income.
He adds: "While a focus on bonds and their perceived safety has left equities in the shade, this is now changing. It is clear that certain areas of the market represent compelling value, but it is important that investors avoid the mistakes of the last 10 years in order to protect their capital and deliver their income requirements."
Nick Kirrage, co-fund Manager, Schroder Income Fund says: "IFAs are telling us that over the last 12 months there has been a marked increase in the number of investors looking to invest for income. With equity income looking increasingly attractive it is understandable that investors are turning to income funds, which provide higher income as well as the prospect of the longer term capital appreciation that savers need.
He adds: "Our income approach is based on value…the market is obsessed with short-term profits but the true profit potential of a business is often very different from that generated in any one year."