Aberdeen Standard Investments

Income investing in a pandemic – capitalising on opportunities

As a consequence of the global pandemic, we currently find ourselves in unchartered waters. Daily life has been altered beyond recognition for many of us and will likely remain that way for some time to come. It is unfamiliar territory for investors too, as we grapple with the effects of the wide-scale lockdown on companies, economies and financial markets.

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For income investors in particular, the environment is completely unprecedented. In the UK, 43 of the FTSE’s 100 companies have cancelled, cut or suspended their dividend payments. That includes major UK companies that have previously been considered totems of dividend security.

Companies have taken these actions for a variety reasons. Banks and insurers face regulatory pressures, and have been told by the Bank of England’s Prudential Regulatory Authority not to pay dividends. Others companies have taken government assistance during the pandemic and so have refrained from paying shareholders for fear of bad press. For a number of businesses though, it is about taking a cautious approach and preserving cash when the economic outlook remains so opaque.

This backdrop is obviously important to income investors, given the significance of dividends and dividend growth for investment returns. We were already dealing with a world of low growth, low interest rates and low inflation. Then the pandemic came along and added to these pressures. This year, income is expected to be 40-50 percent lower than 2019. So what kind of investment approach might help income investors navigate this new terrain?

Quality counts

Income investing has not had the most positive press recently, with the collapse of a high-profile fund and other scandals. We have always maintained that income investing should never be about chasing high yields. Rather, it should be about long-term quality and sustainability. And it is at times like these, when corporate distress is high, that such an approach can prove its mettle.

We look for dependable high-quality companies with strong balance sheets, which enable them to continue to grow their business, reinvest in it, perhaps partake in M&A, and grow their earnings year on year. These quality businesses are more likely to be able to pay dividends, even when conditions change or are challenging. Similarly, we focus on companies with compelling long-term structural growth stories, perhaps with global brands or valuable intellectual property. In the current environment, some of the strongest companies should be able to grow stronger.

Dare to diversify

The pandemic has and will continue to affect different companies and sectors in different ways and at different times. As always, it makes sense to be well diversified and not overly dependent on any one economic scenario, sector or company.

Dispersion across mid-cap and large-cap stocks can be a