Too soon for income investors to return to energy

Too soon for income investors to return to energy

Equity income investors searching for reliable sources of dividends should steer clear of energy companies for the foreseeable future, with more headwinds to come for businesses operating within the sector.

While energy markets – in particular oil – are starting to stabilise, the likelihood of dividend cuts makes many stocks uninvestable for now.

We have already started to see a number of well-known UK companies cut dividends, and the market is expecting the energy sector to follow suit.

We have been avoiding the oil majors like BP and Royal Dutch Shell, as well as their peers globally, and for us, energy remains a sector to underweight for now.

As well as holding very few energy equities, we are diversifying the fund’s equity portfolio away from the UK, with payouts from UK plc likely to undershoot current dividend forecasts.

2016 is about going global for dividends. Both equity and bond markets are signalling that not all is well in the UK, and we believe dividends are likely to disappoint.

Indeed, we can see the figure for total UK payouts undershooting current estimates and actually falling below last year’s total.

While global income stocks currently yield less than UK names, in this environment it is important to diversify.

Global stocks do yield slightly less than UK stocks – within our portfolio the UK stocks have a premium yield of 4.5% versus 4.1% for the global portfolio – but going global allows you to diversify your exposure and make sure your income comes from a variety of different economies and industries.

With the headwinds facing so many UK income names, global diversification can enhance the quality of dividend yields and help sustain the income investors seek.

Vincent McEntegart, manager of the Kames Diversified Income fund at Kames Capital