With the halving of UK dividends this year as companies attempted to shore-up balance sheets against the financial impact of the Covid-19 pandemic, investors have increasingly been looking to other markets for income.
Nevertheless, this doesn’t mean that investors will see the same type of crowding into high-yielding stocks and concentration risk that has occurred in the UK equity income space, according to Timothy Woodhouse, manager of the JP Morgan Global Growth & Income trust.
On a headline basis, the 2020 decline is estimated to be between 44.6 per cent and 45.2 per cent, yielding £61.2bn or £60.6bn respectively.
Source: Link UK Dividend Monitor UK Q3 2020
Prior to the coronavirus crisis the UK market was a hub for high yielding stocks and investors looking for income.
But this had previously led to herding into certain stocks increasing dividend concentration risk, with 85 per cent of total UK dividends coming from the FTSE 100 last year, according to the Link. The remaining 15 per cent was split across the mid and small-cap space.
When asked if there could be a repeat of the UK dividend concertation risk rise in another market offering high yields, Woodhouse said it was unlikely. 
He said if you look at the number of companies offering a 4 per cent yield, the UK currently has around 37 and emerging markets more than 130, signifying a greater number of companies to choose from.
“I think just given the size of the markets you are less likely to see that concentration,” said Woodhouse.
Another reason why a repeat of the dividend concentration issues probably wouldn’t arise in other markets is because UK investors have a “natural bias” towards domestic names, according to Woodhouse (pictured).
He explained: “You know BP, you know Vodafone, and you feel comfortable that you understand what these companies do and you get a good yield on top of that.
“That in itself, leads to that concentration.
“I think you’re going see less of that in other regions: there’s that combination of having more names to invest in with a high yield but also simply having a little bit less of a focus.”
Domestic bias can often be difficult to get away from, however.
Woodhouse continued: “If you were to speak to your average investor in the UK and say to them, ‘you could have a 5 per cent yield at Lloyds or you could have an 8 per cent yield at SberBank – which is a Russian bank – which one do you feel more comfortable having a large percentage of your portfolio in?’
“I suspect the average investor would say, ‘Lloyds’. They know it, they understand it, they may bank with them.
“When it comes to especially a Russian bank that they don’t know a lot about for example, would they be willing to have that same concentration? I suspect not.”
With that in mind, the JP Morgan manager said he was a “big proponent of diversification, in general,” and thinks investors should beyond the UK for other sources of yields.
As well as looking for companies with a yield of at least 4 per cent, Woodhouse’s bottom-up approach also aims to identify companies that can provide capital appreciation, which he said will ultimately underpin the growth of the trust’s dividend going forwards.
This means that the trust can invest in companies which don’t pay a dividend – such as Amazon or Google-parent Alphabet – but have room for share prices to grow.
Holding these two stocks that have benefited considerably from favourable market conditions over the past decade has contributed to significant growth of the trust’s net asset value (NAV) and contributed to its dividend.
“If we were restricted just to companies that had a very high yield, I think we would’ve fallen into the problem you’ve seen so many UK companies have this year where they were forced to cut their dividends but also its share price,” he explained.
“So that ‘double whammy’ of your capital being worth less than it was as well as your income being worth less.”
Without this Woodhouse said you can easily end up with a portfolio that – even if it’s diversified geographically – would still have a high dividend risk because it would rely on just a few names.
Woodhouse concluded: “I think that’s why the investment trust structure is so important because it allows you to have that yield, but also within a framework that allows you to get exposure to companies that stand alone may not pay that yield.”
Woodhouse co-manages the £584.8m JP Morgan Global Growth & Income trust with Helge Skibeli and Rajesh Tanna, both of whom joined in 2019.
Performance of trust versus sector & benchmark over 3yrs
Source: FE Analytics
Over the past three years, the trust it has outperformed both the MSCI ACWI index (33.56 per cent) and the IT Global Equity Income sector (19.86 per cent) with a total return of 33.75 per cent.
It currently has a 3.4 per cent dividend yield, is 6 per cent geared, is trading at a 3.7 per cent premium to NAV, and has ongoing charges of 0.67 per cent.