HL SELECT UK INCOME SHARES
HL Select UK Income Shares fund – Dividend Outlook
Managers' thoughts
HL SELECT UK INCOME SHARES
Managers' thoughts
Steve Clayton - Fund Manager
3 April 2020
The impact of the coronavirus upon nations the world over has been dramatic. Our thoughts are foremost with those who have been most affected. The corporate sector has also been deeply impacted and the consequences of this are fast unfolding around the globe.
Stock markets have fallen sharply. Investor confidence has been shattered and expectations for economic growth are being fast revised downwards. Locking down economies deprives many businesses of a substantial portion of their revenues. Swiftly cutting costs to match may not be possible. We can see companies’ attempts to cut their costs feeding into fast rising unemployment numbers.
With profits and cash flows under intense pressure, many companies, facing the severity of the situation are taking urgent steps to conserve their cash reserves and cutting or scrapping dividends altogether. In some countries, Governments are making the scrappage of dividends a condition for the provision of crisis aid to businesses’ workers.
We are seeing some companies taking the almost unprecedented step of scrapping dividends that have already been declared, even when the shares are trading ex-dividend.
Inevitably this will impact the income of the HL Select UK Income Shares fund. So far we have seen one holding, Paypoint drop planned special dividends and another, Persimmon, has cancelled an already declared dividend, despite having a substantial net cash position. It is increasingly clear that more will follow.
We have paid dividends every month so far, and we have had a policy of paying a “regular” dividend, the value of which was only occasionally altered, along with a variable final dividend that paid out all of the fund’s income that had not been distributed in the first eleven months of the financial year. But dividends are always variable and not guaranteed.
We used projections of future dividends to calculate the appropriate level for the regular payments. Any differences between what we expected the fund to receive and the amounts that actually arrived were reflected in the scale of the final dividend. That policy allowed us to smooth the income that our investors received.
The level of uncertainty that has now emerged in dividend payments is unprecedented. Companies that we would have previously regarded as highly reliable dividend payers have scrapped their payouts.
We expect to declare an unchanged dividend for March of 0.325p per income unit, but we will be reviewing the appropriate level of future payments over the next few weeks. We expect that some of the fund’s holdings will carry on paying the expected level of dividends but others will no doubt seek to make changes, either to the amount or the timing of what they decide to pay to their investors.
As we talk to companies and gather more information on the fund’s future income we will share our expectations with you. We have just passed the quarter end and will publish a review of the fund’s activity and performance shortly.
The HL Select Funds are managed by our sister company HL Fund Managers Ltd.
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