Nine in 10 income investors suffer portfolio impact from Covid-19

Research reveals how private investors are responding to the dividend drought.

Research has revealed that 89% of income investors have seen their portfolios affected by the coronavirus pandemic, with many changing their plans as dividends fall across the UK marketplace.

UK dividends dropped 54% between April and June compared to the same period last year as companies cut or suspended payouts in the face of the Covid-19 crisis. Dividends globally are forecast to be around 20% lower overall in 2020.

The survey from the Association of Investment Companies (AIC), conducted by Research in Finance, which polled 548 private income investors, found that 41% of income investors adversely affected had seen a “considerable” or “big” impact on their portfolios. Consequently, 17% of investors said that they had had to make lifestyle changes and, of these, 63% cut back on non-essential items or activities.

• Top-performing fund, investment trust and ETF data: October 2020
• Trust tips: adventurous and conservative picks outperform
• The new holding Nick Train has been building a position in

One female investor surveyed, aged 52, said: “Things that we have used [the income] for then, we have to think twice now. It tends to be that discretionary spending, be it holidays or big expenditure. Will we postpone those? Possibly.”

Worryingly, 19% of respondents said they had pushed back their retirement plans on concerns over lost income.

“We don’t know what the future holds,” said one male investor, aged 53. “This could be the new normal couldn’t it? The nice 5% or 6% or 7% dividends that you get from some companies, maybe that is never coming again. It could kill it off, so that is a worry for the future definitely.”

A shift to growth

Around a quarter of income investors made changes to their portfolios to try to weather the storm. Almost half switched to growth investments to try to compensate for lost income, while 46% looked to alternative sources of income such as infrastructure and property. Those income investors that were UK-focused have been taking a more global view, looking to both global equity income and global growth investments.

The AIC says those investors holding investment companies felt more secure about income, with 21% not at all concerned about potential losses, compared to 11% of those who didn’t hold them. The association says this is because of investment trusts’ unique ability to maintain dividend payouts. They can do this by holding back up to 15% of revenue reserves and using them to cover dividends in difficult times.

• ii Super 60 fund review: Q3 2020
• With home-working continuing, what’s next for commercial property?
• Take control of your retirement planning with our award-winning, low-cost Self-Invested Personal Pension (SIPP)

‘Real consequences’

“Although we are less than a year into the pandemic, dividend cuts have already had very real consequences for some investors,” says Annabel Brodie-Smith, AIC communications director.

“With a never-ending barrage of bad news, it is understandable that income investors may feel under siege. But the research also revealed investors with investment companies are less concerned than others about a loss of income from their portfolios. A key reason for this is that investment companies can reserve some of their income to smooth their dividends over time, helping them achieve long track records of dividend growth.

“Besides dividend smoothing, other income advantages of investment companies include the ability to invest in higher-yielding hard-to-sell assets such as infrastructure and property, as well as the option of supplementing income from capital profits in cases where a higher income is important to shareholders.”

The research surveyed 548 private income investors between 31 July and 28 August 2020, and conducted in-depth interviews with 10.