Income hunting: If life was tough before, it’s even tougher nowContributor Hugh Gimber
While acknowledging that dividends in some regions will face pressure over the coming months, we argue that now is absolutely not the time to give up on dividends as a key source of income for multi-asset portfolios.
For income-hungry investors, the menu of low-risk options already looked fairly sparse at the start of this year. Fast forward a few months and the challenge is even greater.
With little safe income available, many investors had been forced to take on higher risk to chase higher yields, as we highlighted in January1. This year’s market volatility has been a very clear demonstration of why overstretching for yield can be an unwise approach. Yet today, income requirements remain substantial, and cash and government bond yields—which had started 2020 close to record lows—have been driven even lower.
Central banks across developed markets have cut rates aggressively and launched huge quantitative easing programmes. While these actions are performing a crucial role in ensuring that governments can afford sizeable fiscal stimulus packages, a side effect is that low-risk income is now even harder to find. See Exhibit 1.
EXHIBIT 1: KEY POLICY RATES AND 10-YEAR GOVERNMENT BOND YIELDS
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