But others worry that a continuation of poor earnings growth, particularly within the usually high-yielding banking, oil and mining sectors, could trigger more devastation. Rising pension obligations have added fuel to this argument.
Pension funds mainly use government bonds to discount the value of their liabilities. While that was previously sufficient, today’s environment of sinking yields has lifted combined deficits of the UK’s 6,000 private sector defined benefit schemes to a record £1trn.
This predicament recently saw small-cap plastics manufacturer Carclo slash its dividend and analysts ponder which leading companies will be next.
Concerns over the ability of UK companies to finance dividends has clearly been bothering Neil Woodford. Since its launch in 2014, his popular equity income fund has nearly halved its FTSE 100 holdings to nine. Recent casualties include Royal Mail, BT and defence group BAE Systems.
Fortunately, those who share Mr Woodford’s anxieties have the option to explore other regions. The equity income sector is a vast space offering investors the opportunity to focus on specific areas of the world, or take a more global approach to investing.
Going for growth in the US
The global prominence of North American companies often makes investing across the pond a popular strategy. As the manager of Neptune’s US Income fund, James Hackman clearly has a vested interest in talking up the country’s prospects.
But he also makes some interesting points about the portion of earnings paid out as dividends in a market that, in his view, is often overlooked.
“Dividends in the US have grown [at] more than [a] 7.5 per cent compound annual growth rate (CAGR) since 1999, versus just 3.5 per cent CAGR in the UK,” he says. “While Brexit fears and commodity volatility has hit the UK dividend market, the US income market is in robust health – and growing.
"With a dividend cover of 1.78 and a payout ratio of just 56 per cent, versus 0.72 and 138 per cent in the UK, the US income opportunities for an active manager are significant.”
Also working in the North American market’s favour is its wide variety of choice. Whereas in many countries decent dividends are restricted to certain sectors, such as utilities and telecoms, Mr Hackman notes that 49 per cent of the S&P 500’s constituents yield in excess of 2 per cent.
According to Diane Sobin, head of US equities at Threadneedle, this diversity is enabling investors to find new opportunities in a market where traditional income stocks have soared in value.
As cash-rich, defensive utility companies now cost an arm and a leg, she’s been busy buying up stakes in lower-yielding stocks with growth potential from other sectors.
