At a time of higher inflation and interest rates, investors may start to prioritise dividends, says David Goldman, co-manager on the BlackRock Income & Growth Investment Trust plc (LON:BRIG). However, selectivity is vitally important.
In the giddy days of low interest rates and abundant liquidity, dividends were an afterthought for many investors. Instead, they were drawn to the long-term growth potential of areas such as technology. However, as the economic environment changes, inflation rises and interest rates move higher, investors may start to rediscover the charms of a dividend strategy.
At a time of higher inflation, returns today become more valuable than returns tomorrow. This means that dividends being paid in the short-term have more appeal than long-term capital growth, which is less certain. We are already starting to see this shift in markets as investors move away from previously fashionable sectors.¹
Equally, at a time of market volatility, dividends may provide some stability in a portfolio. When capital values are moving around, a steady dividend is reassuring. Even though yields on bonds have increased, dividends remain one of the few ways to grow income over time. This is important at a time when inflation is exerting a drag on investor returns.
However, investors cannot afford to take a scattergun approach in the current environment. Recession now appears to be a plausible scenario for 2023² and certain companies will struggle as rising energy prices and interest rates bite. In the BlackRock Income & Growth Investment Trust, we have been moving away from consumer-facing areas, for example, recognising that households will come under increasing pressure in the months ahead.
It remains very difficult to predict the trajectory of inflation. We still do not know whether the current inflationary trends are the temporary impact from the significant Covid stimulus, the unwinding of extreme Covid behaviours, a more structural shift in the cost of labour, the impact on costs from the decarbonisation agenda or a combination of the above. Against this backdrop, it will be incredibly important to focus on companies with strong, competitive positions, at attractive valuations that can deliver in this environment.
It is notable that for much of 2021, the majority of companies we have spoken to have been able to pass on cost increases. However, as input costs rise and inflation endures longer than expected, that is likely to become more challenging. As such, we continue to concentrate the portfolio on businesses with the ability to pass on price rises to their customers and those that demonstrate sustainable free cash flow. These companies are best-placed to protect margins and returns – and therefore to grow their dividends – over the medium and long-term.
Another significant unknown is wage inflation. High employment levels are already pushing up wage demands and there is a danger that this will accelerate. The companies we speak to are concerned about employee retention as competition for labour intensifies. We believe employee retention will be an important differentiator in the year ahead given the productivity benefits of a stable workforce.
While it has been heartening to see how swiftly and robustly dividends have come back in the wake of the pandemic, we believe it will be tougher from here. Soaring commodity prices have enabled companies such as Rio Tinto and BHP to pay large special dividends, but this may not persist. Carefully assessing a company’s ability to preserve its cash flows in this environment will be vitally important in generating a resilient and growing income for our investors.
Reference to Specific Stocks: Reference to the names of each company mentioned in this communication is merely for explaining the investment strategy, and should not be construed as investment advice or investment recommendation of those companies
The UK remains the highest dividend yielding market in the developed world³ and the fundamental valuation of the UK is attractive relative to its global peers. We believe most companies in the UK have emerged from the Covid crisis with more appropriate and realistic dividend policies. This gives us confidence that there will remain plenty of opportunities for stock-pickers.
Dividends may become a more important part of overall return for investors in the years ahead. They are not a panacea, however, and we are directing our portfolio to those companies most likely to be able to preserve their margins and cash flow in an increasingly tough environment. These companies are likely best placed to sustain and grow dividends into the future.
This material is not intended to be relied upon as a forecast, research or investment advice and is not a recommendation, offer or solicitation to buy or sell any securities or financial product or to adopt any investment strategy. The opinions expressed are from BlackRock as of July 2022 and may change as subsequent conditions vary.
For more information on the BlackRock Income and Growth Investment Trust and how to access the opportunities resented by the income and growth sector, please visit: www.blackrock.com/uk/brig
¹ https://www.cnbc.com/2022/06/30/tech-stocks-q2-2022-worst-quarter-in-years-for-tsla-amzn-msft-goog.html – 30th June 2022
² https://www.cnbc.com/video/2022/07/25/a-genuine-recession-could-be-coming-to-the-us-in-2023-economist.html – 25 July 2022 https://www.blackrock.com/corporate/literature/market-commentary/weekly-investment-commentary-en-us-20220718-ecb-may-limit-hikes-as-recession-nears.pdf – 18 July 2022
³ Barclays Research, Refinitiv. 10 February 2022
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.
Changes in the rates of exchange between currencies may cause the value of investments to diminish or increase. Fluctuation may be particularly marked in the case of a higher volatility fund and the value of an investment may fall suddenly and substantially. Levels and basis of taxation may change from time to time.
Trust Specific Risks
Liquidity risk: The Fund’s investments may have low liquidity which often causes the value of these investments to be less predictable. In extreme cases, the Fund may not be able to realise the investment at the latest market price or at a price considered fair.
Gearing risk: Investment strategies, such as borrowing, used by the Trust can result in even larger losses suffered when the value of the underlying investments fall.
Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: + 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.
This material is marketing material. The Company is managed by BlackRock Fund Managers Limited (BFM) as the AIFM. BFM has delegated certain investment management and other ancillary services to BlackRock Investment Management (UK) Limited. The Company’s shares are traded on the London Stock Exchange and dealing may only be through a member of the Exchange. The Company will not invest more than 15% of its gross assets in other listed investment trusts. SEDOL™ is a trademark of the London Stock Exchange plc and is used under licence. BlackRock may terminate marketing at any time.
Net Asset Value (NAV) performance is not the same as share price performance, and shareholders may realise returns that are lower or higher than NAV performance.
The BlackRock Income and Growth Investment Trust plc currently conducts its affairs so that its securities can be recommended by IFAs to ordinary retail investors in accordance with the Financial Conduct Authority’s rules in relation to non-mainstream investment products and intends to continue to do so for the foreseeable future. The securities are excluded from the Financial Conduct Authority’s restrictions which apply to non-mainstream investment products because they are shares in an investment trust.
BlackRock has not considered the suitability of this investment against your individual needs and risk tolerance. To ensure you understand whether our product is suitable, please read the fund specific risks in the Key Investor Document (KID) which gives more information about the risk profile of the investment. The KID and other documentation are available on the relevant product pages at www.blackrock.co.uk/its. We recommend you seek independent professional advice prior to investing.
This information should not be relied upon as research, investment advice, or a recommendation regarding any products, strategies, or any security in particular. This is for illustrative and informational purposes and is subject to change. It has not been approved by any regulatory authority or securities regulator.
Any research in this material has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.
This material is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer.
© 2022 BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS, iSHARES, BUILD ON BLACKROCK and SO WHAT DO I DO WITH MY MONEY are trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.