Recently published analysis has illustrated the higher returns from smaller companies, compared to larger companies, over the past ten years. If we go even further back; from 1955 to the present, smaller companies have performed consistently better than their larger counterparts in most years. Going forward, it is likely that smaller companies will continue this trend and provide a more consistent source of income than larger companies.
Companies such as Shell, BP, and AstraZeneca may reduce dividends in the future due to a decrease in dividend cover and there could also be an impact on prospects for growth. This is particularly significant because in an era of low interest rates, the shares of these larger companies have been perceived as a “bond proxy”. Therefore, it is of some concern that a recently published graph from September 2009 to January 2015 shows a fall in dividend cover from 3.2x to 1.6x.
It is likely that interest rates are going to remain low for years to come, so, theoretically, there is going to be more demand for what will potentially be diminishing income returns. Investors are going to be much more reliant on income from equities than they have been in the past.
So, what is the solution to producing consistent and growing dividends? It is essential that income portfolios are restructured to create a balance between smaller companies and larger companies. There are two ways of doing this. Either invest in income funds which are small in themselves and nimble enough to balance between larger caps and smaller /mid caps, as opportunities arise; or, invest specifically in smaller companies income funds.
There are a number of funds to choose from and one of the main advantages is that very often the managers of these funds are more focused than larger cap income fund managers and are enthusiastically striving to produce above average returns.
NB. There are other vital components to portfolio construction in order to create diversity, including infrastructure, student living, fixed interest and property funds.