Page 9 - DIY Investor Magazine | Issue 29

‘WE’VE HAD THE ULTIMATE STRESS TEST AND COMPANIES THAT ARE STILL PAYING DIVIDENDS ARE LIKELY TO CONTINUE.’
However, the shift may change in flavour. There are parts of the market that have seen a snap recovery but are unlikely to see improvements in earnings, and others where valuations have yet to catch up.
Income stocks are one important area that has lagged. Radano says: ‘2020 was a horrible year for income investors. Value underperformed growth significantly and within that, income was the worst-performing sub-sector.
We have forty stocks and only one that cut its dividend. These stocks have duration, predictability of earnings and compelling valuations.’
Moore agrees: ‘Investors need to think about what type of stocks have led the rally. Lots have been zero-yielding - airlines, for example. How many income funds will hold the airlines?
As an income manager, it’s quite possible to find stocks with gearing into that economic recovery, which pay a dividend.’
Both Moore and Radano favour finding cyclical companies that can also sustain predictable demand. Radano says it’s about ‘not betting on hope’.
He likes companies such as Air Products or Union Pacific Railroad, where he sees both growth and income, rather than, say, some of the industrial companies trading at 20-30x earnings that are already likely to be at their peak.
Moore says the pitfalls for income seekers are far lower than they were: ‘It is important to look at dividend cover and at the potential downside.
That said, we went through a pretty dramatic downside scenario in 2020. It’s also worth bearing in mind that the market is pricing in a significant margin for error where companies have problems.’
He suggests some of the better returns from here may come from the stocks where there are some concerns - where companies are paying down debt, for example.
He gives the example of ‘survivor’ DFS, which has been in
a difficult sector, but has grown its market share during the pandemic: ‘We’ve had the ultimate stress test and companies that are still paying dividends are likely to continue.’
The value rally can endure.
However, it may look a little different, as the market reappraises the outlook for certain parts of the economy and the excitement around bombed-out recovery companies ebbs.
In particular, better times may lie ahead for income seekers.
More information on Aberdeen Standard Equity Income Trust
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More information on Murray International here > More information on North American Income here > To buy these trusts login to your EQi account
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Aberdeen Standard Equity Income Trust - GB0006039597 Murray International Trust - GB0006111909
North American Income Trust - GB00BJ00Z303
9 DIY Investor Magazine | Jun 2021