Dividends versus coupons: How to meet the income investing challenge

Portfolio positioning for the recovery and beyond

Investing for income has never been so challenging. Bond yields have been at record low levels for years in the wake of the global financial crisis and quantitative easing programmes. The Covid-19 pandemic saw these central bank policies resume, putting further downward pressure on interest rates.

Dividends versus coupons

Equity income investors are in a strong position as 2021 develops given strong cash positions and growing positive sentiment as vaccines are rolled out and economies reopen - provided the companies they allocate to have come through 2020 relatively well.

State Street Global Markets' Jones underlined the inflation outlook as positive for equities. State Street Global Markets expects US inflation to tick upwards above 2% but to be kept in check by central bank policy, according to its second-quarter capital markets outlook report.

He said: "Given the outlook for inflation [and] the outlook for where I think fixed income yields are probably going, and the degree of cash that is sitting in investors' and households' pockets, that means the capital appreciation properties of equities look a lot more attractive than in the fixed income space at the moment."

Yeats added that the longer-term outlook for global debt levels was "quite concerning" given the amount that governments had been forced to borrow to combat the economic and social effects of the pandemic, such as business closures and restrictions on movement. "Ultimately that at some level has to be paid back," he said. 

However, the knock-on effects will not just be felt in the bond markets, Yeats emphasised. Corporate taxes were likely to increase, he said, which would have an impact across company balance sheets. "It's worth remembering that bonds are higher up the capital structure for a reason," he added.

"The whole debate around where I'm going to get my income [is about] understanding that just going up the risk spectrum is not necessarily the right answer," Yeats stated. 

"Just remember where you are in the capital structure."

While income investing is likely to remain challenging for some time, for those willing to innovate and 'think outside the box', there appear to be many options available. Whether you're dedicated to dividends or convinced by the coupon, the next few years are going to be an interesting journey.