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Questor Income Portfolio: we look at how each of the stocks and bonds we have tipped will fare if we avoid a hard exit from the EU
A Brexit at the softer end of the spectrum now seems much more likely. Whatever their political views, readers of this column will want to know what effect this will have on the income that our holdings generate and on dividends more broadly.
Across the London stock market as a whole, dividends have been rising nicely recently. But a soft Brexit, paradoxically perhaps, is likely to mean smaller dividend increases in future.
This is because British stocks make so much of their money overseas, and those earnings becomes less valuable in sterling terms when the pound gains in value.
“We’ve seen a good run of dividend rises, both ordinaries and specials,” said Sue Noffke, manager of the Schroder Income Growth investment trust, a holding in our portfolio. “Although this is likely to continue, a stronger pound would reduce the rate of growth as overseas earnings get a boost if sterling is weak.”
Although all of our portfolio’s London-listed holdings declare dividends in pounds, readers may hold other stocks that declare them in dollars or euros.
Here, investors won’t know until just before the dividend is paid the exact sum they will receive in pounds because the money is normally converted immediately before the payment is due. Such investors should hope that sterling does not suddenly jump in value.
Broadly speaking, Noffke said, the sectors where dividends would feel the effects of a rise in the value of the pound were commodities, pharmaceuticals and consumer goods. The same would apply to Vodafone, the mobile phone network, a big payer of dividends.
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Those whose dividends should be more immune from swings in the exchange rate include domestic banks and utilities, retailers and housebuilders.
With this in mind, let’s briefly run through where our holdings stand.
Baronsmead Venture Trust is very roughly 70pc domestic. Crest Nicholson is domestic. Dairy Crest is being taken over and no further dividends are expected. Invesco Income Growth is 41pc domestic in revenue terms. Legal & General and Lloyds Banking Group are mostly domestic.
National Grid has operations in America, but Noffke said she “wouldn’t expect the dividend to be affected by currency movements”.
At least a third of Northern VCT’s holdings have a significant level of overseas revenue. Next’s sales are largely domestic but a stronger pound would cut the cost of the goods it imports, with a delay because of the company’s hedging.
OneSavings Bank and Regional Reit are domestic. Royal Mail has overseas operations but “they are too small to move the dial”, Noffke said. Renew Holdings is domestic. Schroder Income Growth has about 37pc of its portfolio in domestic assets.
“We can still see a lot of good opportunities in London-listed international stocks, many of which are at a discount to global peers because of the political risk discount that applies to any UK asset at the moment,” Noffke said.
Standard Life Property Income invests in property in Britain. ULS Technology is also domestically focused. New Residential Investment is listed in New York and operates in America.
Different considerations apply to our bond holdings. Here, interest payments are not subject to change according to the profitability of the business and all are made in sterling. That said, one holding, the Newcastle Building Society Pibs, is not technically a bond and its interest payments can theoretically be suspended if the society gets into financial difficulty. This seems highly unlikely, however.
- Questor archive: telegraph.co.uk/questor
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