You’d be forgiven for thinking there’s not a lot of positive news out there at the moment. You don’t need reminding that the ongoing uncertainty around when, and on what terms, we leave the European Union has been casting a long shadow over the economy. It’s encouraging then to see housebuilder Bellway’s results yesterday which offered a glimmer of hope.
In its interim results for the half-year to 31 January 2019, the FTSE 250-listed housebuilder reported its revenues were up 12.4%, compared to the same six month period last year, meaning pre-tax profits rose 8.3% to £313.9 million.
Cheap borrowing, high employment and demand for affordable housing - through the Government’s Help to Buy scheme - helped the company deliver a positive outcome despite the current Brexit gloom.
As a result the housebuilder announced a 5% rise in the interim dividend to 50.4p per share. The yield on this share is already 4.7%1 which is comfortably above the average for the FTSE 250 at 3.0%.
What’s particularly interesting here is that this is a dividend increase from a company more dependent on the British economy than the larger dividend-paying FTSE 100 multinationals that have benefited from a weak pound since the referendum result. What’s more it’s a company in the housebuilding sector which is notoriously cyclical and sensitive to consumer confidence.
With interest rates still at record lows housebuilders such as Bellway will be paying close attention to whether rates start moving upwards, which makes borrowing more expensive for mortgage-holders.
So can we expect interest rates to rise anytime soon? It’s unlikely. Last week the Federal Reserve took an about turn. Having told the market it was expecting to raise rates four times in 2019, it’s now concerned about the slowdown in global growth. Fed chair Jerome Powell confirmed that there probably won’t be any US rate hikes this year and maybe just one next year.
Yesterday New Zealand’s central bank joined the more dovish trend saying its next move is more likely to be a cut due to a “weaker global economic outlook and reduced momentum in domestic spending”. Closer to home, at last week’s Bank of England monetary policy committee meeting, the nine members voted unanimously to leave interest rates at 0.75%.
While housebuilders, dependent on the ability of people to afford their new properties, will welcome the news of lower for longer interest rates, cash savers will not.
With the end of the tax year just over a week away, equity income funds are one option for ISA and SIPP investors looking for a regular income as well as the potential for capital growth. Crucially, if a weaker global economic outlook causes the markets to be volatile, this valuable income can act as a powerful buffer to counteract falls in asset price levels. If income is reinvested more shares can be bought at a lower price, too.
Our Select 50 list includes a number of equity income funds. The following three look for opportunities in the UK:
The Fidelity Enhanced Income Fund, run by Michael Clark, aims to deliver a higher yield than would otherwise be produced by its dividend-paying investments. It does this by selling to other investors the right to buy the portfolio’s holdings at a slightly higher price in the future. The premiums gathered in this way are used to increase the fund’s yield.
The Franklin UK Equity Income Fund, managed by Colin Morton, aims to provide a growing level of income which is higher than that of the FTSE All-Share, together with capital growth over the medium to long term. When asked about the outlook for UK shares in a recent interview he said: “As an income investor my glass is half-full right now. There are lots of good companies offering really good yields and the outlook is good”. You can watch the interview here.
The JOHCM UK Equity Income Fund is managed by James Lowen and Clive Beagles, who look for dividend-paying companies which are expected to yield more than the market average over the next 12 months and which have the ability to grow their earnings and dividends over time.
Don’t forget the deadline for this year’s ISA is 5 April 2019.
1Dividenddata.co.uk, 27 March 2019
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The value of investments can go down as well as up so you may get back less than you invest. Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not be possible until you reach age 55. Select 50 is not a personal recommendation to buy or sell a fund. This information is not a personal recommendation for any particular product, service or course of action. If you are in any doubt we recommend that you seek advice from an authorised financial adviser.