The collapse of dividends across multiple sectors has seen the UK’s love affair with income investing finally hit a rough patch. Payouts in the UK could fall by nearly half this year, according to Link Asset Services, with some estimates suggesting dividends may take several years to claw their way back to pre-coronavirus levels.
This new normal has triggered a fundamental rethink of some holdings once regarded as portfolio stalwarts, from banking shares stuck in a dividend moratorium to equity income funds left with fewer sources of yield. And it could prompt a new approach to investing.
If investing for income appears to be under threat, an alternative approach is to instead build a diversified portfolio that targets total returns, taking capital gains when required. Total return investing allows greater scope for true diversification by lessening a portfolio’s reliance on companies and markets with higher yields. On top of this, generating income by selling assets rather than taking dividends has proved to be significantly more tax-efficient: the capital gains tax (CGT) allowance is much higher than the dividend allowance, and breaching the former can sometimes incur lower rates of tax.