More than four fifths of income investors have been impacted by a loss of income in their investments due to the pandemic, research from the Association of Investment Companies (AIC) has found.
Researhers surveyed 402 private income investors and found that 28% reported a ‘considerable’ or ‘big’ impact to their portfolios. This, however, is down from 41% last year, highlighting the improving outlook for income investors.
According to the AIC survey, 9% of income investors have had to re-think their future plans or lifestyle in response to dividend cuts, down from 17% last year.
Of those 9%, 41% have had to cut back on non-essential items or activities, 22% have had to change or cancel holiday plans for financial reasons and 16% have had to delay their retirement.
The majority of income investors have not yet had to change their plans or lifestyle, the survey said. Investors in this group were confident they won’t have to make changes even if businesses continue to pay lower dividends, while a further 30% said they could maintain the same lifestyle for three years before any changes would need to be made.
In the second quarter of 2021, global dividends grew 26% year-on-year, but remain 7% lower than pre-pandemic levels according to Janus Henderson’s Global Dividend Index. UK dividends fell 41% in 2020 and dividends globally were 12% lower in 2020 than 2019.
Almost half of income investors who have been impacted by dividend cuts are accepting a lower income for the time being, while 29% have made changes to their portfolio to address the loss of income.
For respondents who made changes to their portfolio, 56% looked for different income-producing investments such as investment companies or bonds, 45% have moved into growth investments, 40% have reduced exposure to investments which have cut dividends and 32% have topped up investments more likely to pay dividends.
Meanwhile, investment companies are seeing a renewed attraction, as almost a fifth of income investors who do not currently use investment companies are considering investing in them in the next 12 months. The most common reason for this change was the reliability of investment companies’ dividends.
Investment companies can reserve up to 15% of their income each year to distribute in a future year, allowing them to smooth dividend increases over time and in 2020, this allowed 85% of income-paying investment companies that invest in equities to increase or maintain dividends, compared to just 23% of equivalent open-ended funds.
Annabel Brodie-Smith (pictured), communications director of the AIC, said: “Although dividends haven’t fully recovered from the pandemic, it seems the outlook is brightening for income investors. Fewer investors are experiencing such a big impact on their portfolios and fewer are having to make hard choices to compensate for the loss of income.”
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