- Dividend hero with reasonable costs
- Plus a strategy possibly ripe for a turnaround
News inflation finally hit the Bank of England’s two per cent target in May is much needed good news for the UK’s beleaguered Conservative government. Although the news has probably come too late for prime minister Rishi Sunak, investors can take stock and make more long-term plans. While the BoE will require evidence that services inflation and wage growth are slowing before it cuts interest rates, investors can think about locking in attractive yields and growing pay-outs.
The drop in the consumer prices index (CPI) is a positive development after three years of inflation misery. That said, the stock market’s reaction suggested a dose of realism in expectations for the timing of interest rate cuts. Core inflation, still at 3.5 per cent, driven by services inflation underpinned by robust wage growth means the BoE will tend towards caution.
For those seeking income, however, this is a good time to plan. Over time equities are the best way to outpace structurally higher inflation and dividends, unlike bond coupons, can grow so long as the companies paying them are profitable and expanding.
On that last point, stock selection is important, as portfolios must look for companies with resilience, earnings quality and diverse revenue streams. Many world economies may have seen a soft landing so far, as the impact of rate rises to combat inflation hasn’t caused the deep recessions feared, but in a low growth environment there will be ‘haves’ and ‘have nots’ amongst listed companies.
Investment trusts with solid dividend growth stock selection strategies are an interesting option for income going forward. Many are on discounts to their net asset value (NAV) and while rates are yet to be cut, expectations they will be should help put a floor under those discounts blowing out further.
Our first featured trust this month is a stalwart of the UK equity income classification and with its record of dividend growth and reasonable costs, actually offers a good case even relative to cheap exchange traded funds. The second trust has struggled for a good few years but offers investors a very attractive yield and a stock-picking philosophy that could be well positioned to benefit if the UK market recovery resumes and, crucially, if it widens to more mid- and small-sized companies.
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