![]() Suddenly, that picture looks a lot better in terms of safety and income investing in bonds instead.” Inflation is also super high, and interest rates going up is going to negatively impact businesses and corporate profits as a result, and the ability to pay dividends. We’ve entered a period a period where Europe is actually in recession and the UK is likely to go into recession at some point this year. The counter argument in favour of bonds comes from another colleague, market strategist Michael Field: “ markets are also highly valued. Furthermore, dividend stocks also hold the potential for dividend growth, which typically more than compensates for inflation and could make them interesting for an income investor.” ![]() “As a result of this general underperformance, traditional equity income stocks are found at attractive valuations, and whilst yields have risen considerably over 2022, to the point where cash can offer attractive rates versus equities, investors are generally well-rewarded for investing at these sorts of valuations in total return terms. There are benefits to holding dividend-paying stocks, especially if the sector is unloved, he says: ![]() He looked at equity income funds and the stocks they own. As a result of their lagging performance, the UK and equity income more generally are at cheap valuations relative to their history.” Further, investors should also consider their options through a balance of risk and reward. “Why hold risk assets such as stocks when investors can achieve a 4%-5% yield by keeping their cash in the bank? Whilst this may make sense from a risk perspective, it’s important to remember that this rate is still insufficient to create a positive real return (net of inflation). My colleague Michael Born, a fund analyst, neatly encapsulates this argument in a recent paper on UK equity income called Dividends Aplenty or Yesterday's Strategy? ( He spoke to Sunniva Kolostyak in a recent video.) And given recent market volatility and ongoing recession risks, the balance of power may have shifted away from equities. ![]() This would be fine when inflation is at 2% but looks paltry when inflation has been five times higher and appears to be stuck at elevated levels. With the FTSE 100 is yielding just under 4%, equity income investors are increasingly feeling like the poor relation. Cash accounts and money market funds are also luring savers and investors in with interest rates and yields that were unthinkable a year ago. After last year’s no-show for bonds, soaring yields have drawn investors back into the asset class – the 2-year UK government bond yield now offers over 5%, and that follows a surprise 50 basis point hike by the Bank of England, which indicated there are more rate rises to come. Surging rates may be squeezing homeowners but they do increase the opportunities for yield hunters. Away from corporate news, the biggest talking points right now are inflation, interest rates and gilt yields.
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