“When things go wrong businesses from BP to Tesco cut their dividends as the first line of defence – they simply don’t have the choice on their bonds.”
At a time when companies such as supermarkets are under increasing pressure, with Tesco announcing it was cutting its interim dividend by 75 per cent earlier this year, this predictability is an advantage.
“You know what you are getting and when you are getting it - so you can calculate down to the last penny what you can pay out at any point in time. It allows structures like a predictable monthly payment from a fund,” adds Ms Johnson.
Of course with 10-year government bond yields at record lows, the area of fixed income investors are targeting becomes more important.
Mr MacDonald notes: “The corporate environment appears pretty benign at present: company balance sheets are in good shape, earnings are growing and cash flows are solid. There is therefore an argument for riskier corporate bonds.
“High yield is the next stop on the risk curve and although spreads have tightened here too, there are still pockets of value to be found where investors are adequately compensated for the added risk. There is much more idiosyncratic risk in this space, though, so careful scrutiny of the individual underlying investments is paramount.
“The key question is whether you are being rewarded for the extra risk you’re taking as you seek out extra yield. Factors like the region or sector can be important, while specific company fundamentals definitely are, even if the default environment is expected to remain friendly. Investors should be satisfied that the manager they pick can make these judgement calls consistently,” he explains.
Equity income
Elsewhere with equity markets moving higher towards the end of the year, there is still some scope for equity income returns, providing you look further afield than the traditional UK dividend payers. The latest UK Dividend Monitor from Capita Asset Services notes the top 15 dividend paying companies in the UK account for approximately 63 per cent of the total dividends paid.
Colin Morton, vice president and portfolio manager on the UK Equity team at Franklin Templeton, says: “Over the past year we’ve witnessed significant volatility in the equity markets, both in the UK and further afield, which – combined with the low interest rate environment – has created somewhat unchartered territory for a number of investors.
“Still, in spite of this backdrop, the importance of equities for income has remained, and seeking quality, cash generative companies that continue to increase their dividends year-on-year remains the fundamental bedrock of equity income investing.
