Where can you go for income?

As blue chips cut dividends...

AS MORE big FTSE 100 names join the list of dividend casualties, the outlook for income seekers is growing increasingly desperate. Troubled miner Rio Tinto, whose share price is down more than 40pc in the past 12 months, last week warned investors that a dividend cut would come.

Rolls-Royce has slashed its own by half – the firm’s first dividend cut in almost 25 years.

The Footsie giants join a long list of businesses struggling to maintain their payouts. But while many are panicking, some fund managers are looking for opportunities.

Nick Kirrage, manager of the Schroder Income fund, says: ‘We talk about the so- called outlook for UK dividends but that just focuses on the 20 biggest companies, which account for two-thirds of the country’s dividends. But there are around 700 companies out there to look at.’

So while others are worrying about the possibility of another recession, he has been topping up his holdings in banks such as Barclays and RBS.

He says: ‘Everyone is so obsessed with PPI and regulation but ignoring the fact that these businesses have been hoarding their profits for the past few years to meet new regulatory requirements. At some point they will have had hoarded enough to start paying out.’

Such optimism does not change the fact that the environment is exceedingly difficult for any investor. Kirrage’s fund is down 15pc over the past year. And many other funds are struggling too.

With a dearth of dividends, some managers could even face ejection from their investment sector. To qualify as an UK Equity Income fund, a manager must deliver a yield which is at least 10pc more than what the FTSE All Share is yielding.

Michael Clark is manager of the Fidelity MoneyBuilder Dividend fund, which has returned 23pc over the past three years and yields around 4.25pc.

He says: ‘We will definitely see areas of the market where dividends are under pressure throughout this year and I am happy to be completely out of some sectors, such as mining.

‘I’m cautious on oil and gas companies – their dividends looked challenges when oil was $80 a barrel, and they are seriously under threat at a price of $30.’

Instead Clark is looking for what he calls safe stocks. There is ‘safety in predictability’ he says, referring to industries such as pharmaceuticals, telecoms, consumer goods and regulated utilities such as water and electricity.

Clark likes support services group Capita. It is a dominant player in its sector with higher barriers to entry and a strong management team which are good at identifying opportunities. The firm yields around 3pc.

He also likes L&G which he says has adapted well to negative developments in the annuity market. The firm is finding opportunities in international expansion and has a strong dividend yield of 5.5pc. Hugh Yarrow, manager of the Evenlode Income fund, is looking for companies with recurring revenues. Firms such as Sage or Compass, which have long contracts with their clients.

He says: ‘We try to invest in things which we are confident people will still be buying in five years’ time.’

A favourite investment is Unilever, which manufactures consumer brands such as Flora, Dove and Domestos. The firm has grown its dividend for 50 years in a row. Yarrow says: ‘People will always need those low-ticket items such as soap and shampoo.’

The fund has returned 30pc over the past three years and yields 3.8pc. Still, it is important to keep things in perspective. HSBC has halved its dividend. On the surface that sounds like terrible news.

Kirrage says: ‘The stock was yielding 12pc, it’s halved that to 6pc. Is that a disaster? It doesn’t sound like a disaster to me.’