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11/01/20213 mins

Finding income in a dividend drought: A contrarian approach

Whatever your stage of life, Covid-19 has caused huge changes. From unprecedented restrictions on personal movement to an accelerated shift to online working and shopping, no life has been untouched. For those in retirement, concerns about reliable income have been growing as the global economic outlook has worsened and dividend cuts abound.

Why income investors should look globally

The pandemic has had a major impact on corporate revenues, and it will take some time for companies to fully get back on their feet. To secure their long-term survival many businesses have boosted their cash reserves by reducing their dividends, with roughly half of the UK’s FTSE 100 companies cancelling, cutting, or suspending payments.

For retirees reliant on equity portfolios for income, the scarcity of dividends is a headache. Historically, a relatively small number of UK stocks have provided the majority of income, but now investors with a UK bias are facing a potential shortage.

The obvious answer to concerns about the concentration of income risk in the UK is to diversify. Investing in a portfolio of global equities provides an income stream from a much broader pool of investments than is available from UK companies alone.

A contrarian approach can pay dividends

The Scottish’s high-conviction, bottom-up investment approach delivers an equity portfolio that is spread across multiple regions and sectors, providing diversification of risk. Although our contrarian investment style doesn’t actively target companies that pay high dividends, the out of favour investments that we are attracted to tend to pay higher dividends over the course of an economic cycle. That rewards our shareholders, while we wait for the improving business prospects that we foresee.

The Scottish has a dividend yield of around 3.2%, which is currently the highest in the AIC global sector. The recently announced final dividend extends the Company’s long track record of annual regular dividend increases to 37 consecutive years.

A dividend reserve – the benefit of long-term thinking

Over the years, The Scottish has prudently built a substantial revenue reserve in preparation for leaner times. As at 31 October 2020, this reserve was greater than 2.5 times the targeted annual dividend for the year to 31 October 2021. It gives the Company the ability to keep paying its shareholders when many businesses opted to curtail dividend payments.

Although not guaranteed, The Scottish’s intention to continue to grow the regular dividend over the longer term backs up our status as a ‘dividend hero’ (as recognised by the Association of Investment Companies).

Please remember that past performance may not be repeated and is not a guide for future performance. The value of shares and the income from them can go down as well as up as a result of market and currency fluctuations. You may not get back the amount you invest.

The Scottish Investment Trust PLC has a long-term policy of borrowing money to invest in equities in the expectation that this will improve returns for shareholders. However, should markets fall these borrowings would magnify any losses on these investments. This may mean you get back nothing at all.

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