Why ‘income today, income tomorrow’ matters – A conversation on UK Equity

Georgina Millar

Hello, and thank you for joining me for another quarterly conversation with some of the portfolio managers from the Invesco UK and European Equities team. Now, a number of clients have been asking me a lot recently about the importance of income in portfolios, and that feels very timely, in particular for our UK income team, because they have just passed their five year milestone of running their UK income products.

So this morning we're going to talk all things UK income. And I'm joined here by James Goldstone and Kieran Mallon. Now James Kieran, can you tell me why it's income and why should income and yield be such an important component in investors portfolios today and into the future?

James Goldstone

Well, the couple of things. I think firstly, by managing a portfolio for a certain level of yield, we have to find the companies that are capable of paying dividends that deliver value.

And in order to do that sustainably, companies need to obviously be profitable and to generate cash. And they need to be managed by people and overseen by people that recognize the importance of delivering a return to investors. And we think there's a classic hallmarks of successful investments over the long term. So the first thing to say is that income as a style, if you like, leaves us fishing in a pond.

As you know, investment ideas are more likely to be successful as far as the income itself is concerned. I think it's maybe more interest now because of the inflation that we've seen in the last few years. That might be making people more interested specifically in equity income, because equity dividends,real dividends, they're indexed to they can match or even even beat inflation.

And so for people that draw in the income that preserves their purchasing power might even grow their purchasing power over time. And even for those investors that don't need the income right now, they can leave that to build up and to compound in portfolios. And that compounding effect can deliver really impressive capital growth over time. So I think right now in the in the face of, you know, more elevated inflation and persistent concerns about inflation, people are understandably most in the in equity income.

Georgina Millar

Okay. Yes, that's very clear. And when you guys think about your, UK income equity products, how do you go about finding that yields, capturing the income.

Ciaran Mallon

So because we've got portfolios which are trying to produce a good level of income today, so to exceed the Footsie all-share index and because we want the dividend from the portfolio to grow to at least to to hopefully keep up with inflation or do better than that, we think about companies in two categories.

One is income today and one is income tomorrow. So income today helps us to pay the dividend from the overall portfolio. Have the yield at a good level and income tomorrow allows us to grow the dividend over time. And those are different kinds of companies. So some companies quite rightly are distributing lots of their profits to shareholders. And we encourage them to do that.

If it's better than holding onto the money and make lower returns on it. Other companies, we encourage not to pay out lots of dividends because they can reinvest in themselves to grow. And if we put those two together in the portfolio, we can have hopefully one that can achieve good income today and growth in income for the future. And that growth also should be accompanied with capital growth as well.

Georgina Millar

Yes. And so aim for balance within your portfolio across both income today and income tomorrow.

Ciaran Mallon

Yes, we want balance where we're looking for diversification of balance in the portfolio in lots of ways. And one of them is around incumbents, around those two different categories. We don't seek a particular number in those, but there's a good balance between the two of those. We also look for good diversification of balance in the sectors that we're exposed to and the sources of that income. And we hope, therefore, that also makes the dividend and the dividend growth more reliable than any individual company in the portfolio.

Georgina Millar

Okay, great. And when does this strategy this is the million dollar question. When does it work the best.

James Goldstone

Well we as you said at the beginning with five years in. Yes. And you know, we've been doing it this way from the beginning. And the experience so far has been that, that diversification at portfolio level that you just talked about has meant that the portfolio has been able to perform in a number of different market environments. There are lots of ways of constructing portfolios and lots of different types of portfolio that could deliver the income. But we found that the way that we do it has meant that the performance, the capital performance of portfolios proved to be really resilient. So as well as having a diverse stream of income, you know, not an overreliance on one particular company or particular group of companies where that income might be a risk.

We're also getting portfolio level diversification. And just recently in April, when we had all the disruption around the tariffs, announcements and trade, that was the most recent test. And once again, the performance did prove to be really resilient.

Georgina Millar

Yes, the portfolio seemed to adapt to the changing market conditions, which was great. Well, look, thank you very much for joining me this morning.

If you've got any questions following this conversation, please don't hesitate to get in touch with your distribution contacts at Invesco.

Thank you very much.