20th June 2013
The Mindful Money fund manager interview
As market volatility hits the US and UK bond markets on the back of fear that quantitative easing is due to be tapered back Adam Avigdori manager of the BlackRock UK Income fund urges investors to look to income delivering shares writes Philip Scott.
But for UK investors it is not just market volatility that need concern them. Official data released this week from the Office for National Statistics showed that the rate of inflation, as measured by the Consumer Price Index (CPI) had jumped from 2.4% to 2.7% in May, with rises in air fares and clothing prices largely to blame.
As a result, there is not a single standard savings account available to savers that can match, let alone beat that rate. As a result, one of the only options left to them is to look to the stock market to boost income.
In an environment of rising bond yields investors should consider the importance of future dividend growth urges Avigdori. He adds: “If you already have a high dividend yield and it does not grow, your shares will be far more susceptible to profit-taking in the event of rising yields. If companies can convince investors that they can grow dividends faster than inflation, gilts or corporate bonds become relatively less attractive.”
In terms of the state of play of dividends – a share of profits companies pay to investors, according to the widely read Capita Registrars’ Dividend Monitor Report, shareholder payments from UK listed firms in the first three months of year dropped by almost 25% compared to the same period in 2012.
However the overall figure was skewed by a combined £4.4bn worth of special dividends paid out by FTSE 100 giants Vodafone and Cairn Energy. Removing these from the equation, dividends paid by UK corporations actually grew by more than 6% in the first quarter. Notably UK banks did not follow this trend, as numbers show they collectively paid out £476m, down from almost £1.6bn in the first three months of 2012, representing a collapse of 70%.
But the longer term outlook is better for the year as Capita anticipates that a total of some £80.5bn in dividends will be paid out in 2013.
The Blackrock UK Income fund aims to provide its investors an above-average and growing income without sacrificing the benefits of long-term capital growth. Presently it is yielding some 3.68%, well above the current rate of inflation. Over the past five years it has achieved a return of 42%, outpacing the average UK equity income return of 40% for the period.
Avigdori, highest weightings in the £593m fund are towards financials as well as consumer goods and services. Among his top 10 stocks are some of the biggest dividend payers in the UK including oil giant Royal Dutch Shell, British American Tobacco and Vodafone. He also holds dividend paying banks HSBC and Barclays.
Avigdri says: “The potential tapering of quantitative easing in the US will be an interesting period for markets. QE has certainly helped avoid disaster in the UK, Europe and the US. The US is in a healthier economic position than the UK or Europe and that is why this question has arisen. However, QE in some form will be around for longer than many people think, although I expect the markets to worry about it continuously and remain volatile as a result.
“Right now I am focused on predictable earnings, dividend growth in real terms and high free cash flows that are sustainable. Companies like National Grid, Spectris, Reed, Admiral, eSure, GlaxoSmithKline and Imperial Tobacco spring to mind. Equally important are companies that have competitive long term advantages and franchises such as Reed, Spectris, Legal & General, Wolseley, Shire, Tate & Lyle, or HSBC.”