Figure 9: Top 10 revenue counterparties

Firm	% of total portfolio
Ecotricity Limited	9.2
Viridian Energy Supply	7.8
Office of Gas and Electricity Markets	6.4
Npower Limited	6.3
Statkraft Markets GmbH	5.9
Bespoke Supportive Tenancies Limited	4.6
Smartestenergy Limited	4.5
Total Gas & Energy Limited	4.4
Good Energy Limited	4.4
Gloucestershire County Council	4.1

Source: GCP Infrastructure Investments

Figure 10: Top 10 project service providers

Firm	% of total portfolio
WPO UK Services Limited	21.0
PSH Operations Limited	13.0
Vestas Celtic Wind Technology Limited	11.3
Solar Maintenance Services Limited	9.7
A Shade Greener Maintenance	8.7
2G Energy Limited	5.9
Pentair	4.6
Atlantic Biogas Ltd	4.6
Thyson	4.6
Cobalt Energy Limited	4.1

Source: GCP Infrastructure Investments

Recent investment activity

Although there were no new investments made over GCP’s 2024 financial year, the company did make one new loan to an existing borrower, totalling £2.6m. Follow-on investments of £24.7m were also made, with these focused on restructuring and management to preserve value and potential future profitability. This was offset by repayments of £39.2m, giving a net repayment from the existing portfolio of £11.9m.

Figure 11: Outflows (investments)

Figure 12: Inflows (repayments)

Source: Gravis Capital Partners

Source: Gravis Capital Partners

Conservative assumptions

Figure 13: Valuation assumptions as at 30 September 2024

Source: GCP Infrastructure Investments

Figure 13 summarises the key assumptions used in forecasting cash flows from renewable assets in which the company is invested, and the range of assumptions that the investment adviser observes in the market. GCP’s advisers traditionally take a conversative approach, with the chart highlighting alternative, more aggressive valuation assumptions that could be taken. The net effect of this is that, were GCP to assume the most conservative assumptions in every category, the end-September NAV of 105.22p would be reduced to 101.37p. By contrast, were GCP to assume the least conservative assumptions in each category, the NAV would have been 115.94p.

Were GCP to assume the least conservative assumptions in each category, the NAV would have been 115.94p.

Such an approach is admirable, as it reduces the likelihood and severity of any unexpected shocks to GCP’s NAV, e.g. a sharp reversal in wholesale gas prices. It also raises the possibility of further NAV uplifts from portfolio disposals, such as with the Blackcraig wind farm. Note that valuation metrics do not affect either the dividend pay-out or the share price yield.

Sensitivities

The investment adviser also provides a sensitivity analysis for its cash flows. Figures 14 and 15 show the impact of changes in power prices and changes in its base case inflation forecast.

As noted, one of the main areas of focus for GCP’s capital recycling programme is reducing the impact of power price volatility on its cash flows and NAV. As such, we expect the figures highlighted in Figure 14 to reduce materially going forward.

Figure 14: Impact of change in forecast electricity prices

Figure 15: NAV impact associated with a movement in inflation

Source: GCP Infrastructure Investments

Source: GCP Infrastructure Investments

Performance

Despite less-favourable market conditions over the last few years, GCP has still managed to deliver a NAV total return of 33.6% since 2019. This supports our view that the market reaction, which has seen shares fall by 22% over the same period, is in no way a fair reflection of the quality of the company’s underlying assets.

Figure 17 illustrates the significant outperformance of GCP over the sterling corporate bond index. This figure provides another illustration of the tangible returns generated by the company above direct market comparables. We believe there exists a clear advantage for investors seeking sustained long-term distributions in GCP’s strategies, particularly in the face of increasing bond market volatility.

Figure 16: GCP NAV total return

Figure 17: GCP NAV total return performance relative to sterling corporate bond performance

Source: Morningstar, Marten & Co

Source: Morningstar, Marten & Co

Whilst the NAV total return has been modest over the past 12 months, the company is yet to fully realise the benefits of its capital recycling efforts due to transaction delays experienced throughout the year. As we have noted, these are now expected to flow through the portfolio over the first half of 2025, suggesting there is a significant amount of potential upside as these positions are realised, bearing in mind the 6.4% premium to NAV at which the Blackcraig windfarm investments were solid. Additional realisations at or above NAV can only work to highlight the irrationality of the current discount, which remains near historical extremes. Coupled with improving market conditions, an impressive policy backdrop, and a long track record of capitalising on changing market dynamics, we believe there is a considerable opportunity for investors at current prices.

Figure 18: Cumulative total return performance over periods ending 31 December 2024

	3 months (%)	6 months(%)	1 year(%)	3 years (%)	5 years (%)
GCP share price	(7.8)	(8.0)	7.5	(16.9)	(22.0)
GCP NAV	0.6	1.0	2.2	18.8	33.6
Sterling corporate bonds	(0.3)	2.8	6.8	(9.9)	(4.9)

Source: Morningstar, Bloomberg, Marten & Co

Peer group

Figure 19: Infrastructure peer group comparative data as at 31 December 2024

	Premium / (discount) (%)	Dividend yield (%)	Ongoing charge(%)	Market cap (GBPm)
GCP Infrastructure Investments	(33.3)	10.0	1.10	609
3i Infrastructure	(12.8)	3.9	1.65	2,988
BBGI Global Infrastructure	(15.1)	6.8	0.93	896
Cordiant Digital Infrastructure	(26.2)	4.4	0.90	697
Digital 9 Infrastructure	(58.5)	0.5	1.33	164
HICL Infrastructure	(23.9)	6.9	1.14	2,386
International Public Partnerships	(18.7)	7.0	1.20	2,286
Pantheon Infrastructure	(22.1)	4.7	–	416
Sequoia Economic Infrastructure	(17.3)	8.7	0.95	1,238
Peer group median	(22.1)	6.8	1.1	896.0
GCP rank	8/9	1/9	4/8	7/9

Source: Morningstar, Marten & Co

Up-to-date information on GCP and its peers is available on the QuotedData website

GCP sits within the AIC’s infrastructure sector, which is made up of three companies that invest predominantly in public/private partnership project equity (BBGI, HICL and International Public Partnerships), two companies that have more revenue exposure towards demand driven assets (3i Infrastructure and Pantheon Infrastructure), two digital infrastructure companies (Cordiant Digital Infrastructure and Digital 9 Infrastructure) and one company (Sequoia Economic Infrastructure, which – like GCP – invests primarily in infrastructure debt, but using a much broader definition of what constitutes infrastructure).

Since our last note, median discounts in the infrastructure sector have widened from 15.9% to 22.1%. Unfortunately for GCP, its discount has slipped further, falling to 32.6%.

After a positive re-rating earlier in the year, GCP’s discount is now the second-widest in the sector, behind Digital 9 Infrastructure, a trust in managed wind-down following a number of operational issues. By contrast, as we have highlighted, GCP continues to execute well. We are confident that the discount remains a temporary phenomenon, given the quality of the company’s assets and the reliability of its earnings. Almost two-thirds of GCP’s investments are regulated or contracted, de-risking returns through highly visible and increasingly stable earnings. This structure has provided the foundation for the company’s current capital programs and leaves the adviser in a strong position to rebalance the portfolio when it does begin to make new investments.

GCP also boasts the highest dividend of its immediate peer group, adding additional appeal to the shares.

Figure 20: Infrastructure peer group cumulative NAV TR performance ending 31 December 2024

	3 months (%)	6 Months(%)	1 year(%)	3 years (%)	5 years (%)
GCP	(0.6)	1.0	2.2	18.8	33.6
3i Infrastructure	0.8	5.2	10.3	39.8	80.1
BBGI	1.4	2.5	5.4	23.0	40.7
Cordiant Digital Infrastructure	2.7	3.6	14.4	35.5	n/a
Digital9 Infrastructure	0.1	(42.4)	(55.3)	(52.4)	n/a
HICL	1.3	1.6	3.5	17.5	30.6
International Public Partnerships	1.4	0.8	1.8	17.9	28.3
Pantheon Infrastructure	0.9	5.6	12.0	n/a	n/a
Sequoia Economic Infrastructure	0.5	2.0	8.0	14.0	23.2
Peer group median	0.9	2.0	5.4	18.3	32.1
GCP rank	9/9	7/9	7/9	4/8	3/6

Source: Morningstar, Marten & Co

Alternative peer group – renewable energy companies

Figure 21: Renewable energy peer group comparative data as at 31 December 2024

	Premium / (discount) (%)	Dividend yield (%)	Ongoing charge(%)	Market cap (GBPm)
GCP	(33.3)	9.9	1.10	609
Aquila Energy Efficiency Trust	(45.1)	0	–	43
Aquila European Renewables	(27.0)	8.8	1.10	207
Bluefield Solar Income	(24.9)	9.4	1.02	562
Downing Renewables & Infra.	(32.9)	7.3	1.60	135
Ecofin US Renewables	(52.6)	2.3	1.78	34
Foresight Environmental Infrastructure Group	(31.0)	10.3	1.24	490
Foresight Solar Fund	(32.8)	10.6	1.15	428
Gore Street Energy Storage	(51.4)	14.4	1.42	245
Greencoat Renewables	(24.6)	8.1	1.18	769
Greencoat UK Wind	(17.4)	7.6	0.92	2,954
Gresham House Energy Storage	(59.3)	12.3	1.19	256
Harmony Energy Income	(26.5)	0.2	–	148
HydrogenOne capital growth	(78.3)	0	2.56	28
NextEnergy Solar	(32.6)	12.8	1.11	383
Octopus Renewables Infrastructure	(34.5)	8.9	1.16	378
SDCL Energy Efficiency Income	(38.3)	11.2	1.02	608
The Renewables Infrastructure Group	(27.5)	8.5	1.04	2,173
Triple Point Energy Efficiency	(41.5)	11.9	2.06	46
US Solar Fund	(42.9)	5.3	1.39	105
VH Global Energy Infrastructure	(42.1)	8.8	1.39	255
Peer group median	(33.3)	8.8	1.2	256.0
GCP rank	11/22	8/22	5/21	4/22

Source: Morningstar, Marten & Co

In light of the increasing importance of renewable energy within GCP’s portfolio, we feel it is also relevant to compare the company to the constituents of the renewable energy infrastructure sector, shown in Figure 21. However, it is worth noting that this encompasses a diverse range of companies which are not all directly comparable to GCP, such as Ecofin US Renewables and the US Solar Fund, which have much-longer-term PPAs and are therefore less exposed to energy price volatility. GCP’s asset base also differs widely from the energy storage companies – Gore Street, Gresham House and Harmony – and the energy efficiency companies – Aquila, SDCL and Triple Point.

We think the best comparators are Bluefield Solar, Foresight Solar, Greencoat UK Wind, Foresight Environmental Infrastructure, NextEnergy Solar, Octopus Renewables and The Renewables Infrastructure Group.

Notably, in contrast to the lower discounts in the infrastructure sector, GCP’s discount is in line with the median for the renewable energy peer group, highlighting the negative sentiment surrounding the sector.

Figure 22: Renewable energy peer group cumulative NAV TR performance ending 31 December 2024

	3 months (%)	6 Months(%)	1 year(%)	3 years (%)	5 years (%)
GCP	(0.6)	1.0	2.2	18.8	33.6
Aquila Energy Efficiency Trust	7.9	7.9	5.9	8.8	n/a
Aquila European Renewables	0.8	(2.6)	(10.7)	1.9	n/a
Bluefield Solar Income	1.8	(2.4)	(0.9)	24.2	45.2
Downing Renewables & Infra.	1.0	1.3	4.1	30.5	n/a
Ecofin US Renewables	6.4	(17.8)	(25.0)	(20.3)	n/a
Foresight Solar Fund	1.8	1.7	2.1	25.6	50.9
Gore Street Energy Storage	1.9	(3.3)	(4.9)	15.5	46.9
Greencoat Renewables	0.7	(0.9)	(1.0)	24.9	42.1
Greencoat UK Wind	1.6	2.4	2.4	40.9	74.0
Gresham House Energy Storage	1.3	(16.3)	(24.4)	4.5	37.7
Harmony Energy Income	(6.7)	(8.0)	(22.8)	n/a	n/a
HydrogenOne Capital Growth	0.0	(2.7)	(0.6)	5.3	n/a
Foresight Environmental Infrastructure Group	(1.2)	0.1	(1.8)	31.6	49.7
NextEnergy Solar	(1.5)	(2.6)	(1.8)	16.2	31.5
Octopus Renewables Infrastructure	1.5	2.8	2.7	18.9	n/a
SDCL Energy Efficiency Income	1.7	3.7	7.2	4.2	25.7
The Renewables Infrastructure Group	1.6	0.4	(1.5)	20.5	40.8
Triple Point Energy Efficiency	1.8	32.6	22.6	38.3	n/a
US Solar Fund	6.9	1.1	(6.0)	(2.8)	2.7
VH Global Energy Infrastructure	1.3	(1.6)	10.6	22.4	n/a
Peer group median	1.5	0.1	(0.9)	18.8	41.4
GCP rank	18/21	9/21	8/21	11/20	9/12

Source: Morningstar, Marten & Co

Quarterly dividend

Dividends are declared and paid quarterly. Shareholders are able to elect to take their dividend as scrip (in shares rather than cash). In its 2024 financial year, GCP’s target dividend remained stable at 7.0p in line with its previous three financial years.

Discount

Over the past 12 months, GCP’s shares have traded on an average discount of 30.2%, a high of 22.2%, and a low of 37.2%. As of publishing, the discount stood at 32.6%. As Figure 23 shows, this narrowed considerably over the first half of 2024 as markets reacted to the expectation of lower interest rates. Unfortunately, as we have noted, financial conditions have steadily tightened in recent months, which has weighed on GCP’s shares. Despite this, on balance we remain confident that the overall policy backdrop remains supportive of the re-rating seen in the first half.

Figure 23: GCP discount over five years ending 31 December 2024

Source: Morningstar, Marten & Co

Fees and costs

The investment adviser receives an investment advisory fee of 0.9% a year of the NAV net of cash. This fee is calculated and payable quarterly in arrears. There is no performance fee. The investment adviser is also entitled to an arrangement fee of up to 1% (at its discretion) of the cost of each asset acquired by GCP. Gravis will generally seek to charge the arrangement fee to borrowers rather than to the company, where possible. To the extent that any arrangement fee negotiated by the investment adviser with a borrower exceeds 1%, the benefit of any such excess shall be paid to the company. The investment adviser also receives a fee of £70,000 (subject to RPI adjustments) a year for acting as AIFM, which was £89,000 for the 2024 FY, after adjustments.

The investment advisory agreement may be terminated by either party on 24 months’ written notice.

Apex Financial Services (Alternative Funds) Limited is GCP’s administrator and company secretary. Depositary services are provided by Apex Financial Services (Corporate) Limited. The fee for the provision of these services during the year was £1.008m (FY23 £1.034m).

The ongoing charges ratio for the year ended 30 September 2024 was 1.1%, unchanged from the prior year.

Capital structure and life

As of 31 December 2024, GCP has 884,797,669 ordinary shares outstanding, of which 18,915,019 are held in treasury. The company’s financial year end is 30 September and AGMs are held in February.

GCP is an evergreen company with no fixed life and no regular continuation vote.

Gearing and derivatives

Structural gearing of investments is permitted up to a maximum of 20% of NAV immediately following drawdown of the relevant debt. At 30 September 2024, GCP’s net gearing was 4.5%, down significantly from 10.8% in FY2023.

As of 30 September 2024, the company has credit arrangements of £150m across four lenders: Lloyds, AIB, Mizuho and Clydesdale. At year end, £57m was drawn.

Major shareholders

Figure 24: Major shareholders

Source: Marten & Co

IF the ABDRN fcast is anywhere correct and your plan is to buy an annuity in 2026, maybe just maybe, unless Rachel from accounts rides to your rescue, you should have a contingency plan in place.

GL

Real Estate

UK real estate market outlook Q4 2024

Following months of stabilisation, the UK real estate market is reaching an equilibrium point.

Authors

David Scott

Head of UK Investment Research, Real Estate

Lance Eddis-Finbow

Senior Real estate Investment Analyst

Date: 21 Oct 2024

Key Highlights

• The UK retains a position of cyclical strength, as growth remains robust and inflationary pressures have largely subsided. 
• Competitive tension for equity-backed buyers is returning for prime assets in favoured sectors. 
• Best-in-class assets will shine, particularly in the industrial and logistics, retail warehouse, and residential segments.

UK economic outlook

Activity

Economic growth remained robust over the second quarter at 0.5%, as the consumer and output sectors absorbed respective headwinds in their stride. The UK retains a position of cyclical strength, but it finds itself staring down a challenging fiscal outlook. While this is markedly better than a starting position of cyclical weakness, it doesn’t solve the new Labour government’s problems in closing a projected £30 billion shortcoming. Fiscal space is likely to be created from tweaks to the Bank of England’s (BofE) quantitative tightening regime, but additional revenue raising through amendments to capital gains and inheritance tax will be needed to bridge the gap. That said, growth is at the centre of Labour’s manifesto, and so the balance between fiscal tightening and economic expansion will be under scrutiny this autumn.

Inflation

Domestic inflationary pressures in the UK seem to have faded over the summer months. While higher energy prices and fading base effects will soon contribute to the headline figure drifting higher, this is not expected to materially affect the progress made to this point. Indeed, largely positive economic signals afford the BofE a healthy margin of error in its policy path. However, it’s likely to err on the side of caution, as endogenous pressures and uncertainty around official data could complicate the path ahead.

Policy

Policy remains in restrictive territory and is quickly diverging from the more aggressive paths coming from the Federal Reserve and the European Central Bank. By holding borrowing costs at 5% in September in an 8-1 vote, the BofE emphatically reinforced its message to maintain caution. We therefore expect a series of quarter-rate cuts to follow from November. Given current levels of caution and the headroom available, we see the possibility of more rapid rate cuts if growth slows or the BofE believes that inflation persistence has dissipated, especially from the second half of next year.

(%)	2021	2022	2023	2024	2025	2026
GDP	7.60	4.10	0.10	1.10	1.30	1.10
CPI	2.60	9.10	7.40	2.60	2.00	2.00
Policy Rate	0.25	3.50	5.25	4.75	3.75	2.75

Source: abrdn, October 2024
Forecasts are a guide only and actual outcomes could be significantly different.

UK real estate market overview

Following months of stabilisation, the UK real estate market is reaching, or has reached in some cases, an equilibrium point. Not only has the level of capital value decline for out-of-favour sectors moderated, but competition among the favoured and best-in-class assets has strengthened for certain segments of the market. With income returns across the favoured sectors remaining robust, total returns for the residential, industrial, and hospitality segments are now comfortably in positive territory year to date. Out-of-favour segments are struggling, largely as a result of limited liquidity, with a reasonable bid/ask spread remaining in place.

According to the MSCI Quarterly Index, all property saw capital values stabilise at 0% over the second quarter of 2024. As expected, the favoured sectors of retail warehousing, industrial, and residential drove positive growth of 1.5%, 0.6%, and 0.6%, respectively, while offices lagged at -1.8%. As ever, the bifurcation between best-in-class assets and poorer-quality stock will continue to widen as transactions pick-up, with offices offering the greatest opportunities. 

Total returns increased over the second quarter to 1.2%, given less severe capital declines. The favoured sectors prevailed, as with capital value growth. The retail warehouse sector, in particular, posted a very robust return during the second quarter, with a total return of 3.1%, the strongest return for any segment. During the first half of 2024, all property saw a positive total return of 1.9%.

The UK real estate investment trust (REIT) index has generated a total return of 23.1% in the 12 months to the end of the third quarter, according to FTSE EPRA. The UK direct real estate market has historically lagged the UK REIT index by six-to-nine months, which provides a greater level of confidence that we are entering into a growth phase for UK direct real estate. In addition, UK REITs have been actively raising capital to deploy into growth strategies, rather than balance sheet repair, with a total of £2.27 billion raised in 2024. This sentiment is carrying over to the direct space, where the second quarter of 2024 recorded the highest investment volumes since the third quarter of 2022 at around £15 billion. Cross-border and private capital have been the most active year to date on the acquisitions side, while disposals from institutions have slowed from their recent peak in 2021

UK real estate market trends

Offices

Bifurcation remains the main storyline in the office sector, as best-in-class space receives the attention of occupiers and investors. This leaves secondary space suffering, with prolonged vacancy rates and an uncertain future. Rental value growth in the favoured and undersupplied West End submarket has increased by 7.7%, taking prime headline rents to £140 per square foot, according to JLL. Despite a stickier vacancy rate in the London City office submarket, there is also evidence to suggest that tenants are willing to commit to higher rents to secure truly best-in-class space. The city recorded prime rental growth of 10% in the 12 months to the end of the second quarter of 2024, taking prime headline rents to £82.50. We still expect the West End to outperform over our forecast horizon, given supply constraints and more positive vacancy dynamics. 

Across the UK, secondary offices have dragged capital values into steep annualised declines, running at -11.5% over the year to June. While these declines are severe, they are up from their low of –19.4% over the previous year. They have also slowed notably over the first half of 2024. With further reductions in pressure due from the BofE, we expect further declines to slow, particularly for well-located prime assets in central London.

With financing costs moving in the right direction, we are seeing an increase in acquisitions for conversion to hotel and residential use. A large amount of central London’s 20-plus million square feet of vacant stock will need to be retrofitted or converted in the near future to comply with regulations. The regions are proving less desirable for core investors, although a notable few assets across central locations in the Big-6 markets have traded recently. 

Industrials and logistics

Largely unchanged from the previous quarter, the industrial and logistics sector is benefiting from structural drivers. Rental growth and vacancy rates are softening from their respective post-pandemic strengths, although this is more of a normalisation of the sector rather than any structural weakness. Capital values have largely levelled off over the year to June, at a modest -0.2%, and contributed to a market-leading 4.2% total return over the same period. 

Supply remains elevated in response to the strength in demand seen over the pandemic. Over 55 million square feet is currently under construction across the UK, according to CoStar, although construction starts have slowed materially and currently account for 1.5% of stock. Outward shifts in yields, prohibitive development financing costs and rising construction costs should maintain this supply balance. And with tenant appetite for ‘green’ buildings remaining strong, we see robust fundamentals in the future.

While overall demand has slowed from its peak, large releases of warehousing space from troubled retailers have helped drive net absorption into negative territory over 2024. This would be more concerning if the sector had structural troubles. Instead, tenant preferences for environmental, social and governance-compliant buildings, and expectations of a strengthening economy, should feed into growing demand. As such, we expect rental growth to remain robust, driven by ‘green’ premiums and refurbishment activity capitalising on these premia.

Investors remain upbeat about the sector. This is reflected in 2024’s year-to-date investment volumes comprising 19% of the market’s total, equalling the 10-yr average for the sector. REITs have been particularly active over 2024, as they recycle and raise additional capital in the expectation of improving economic conditions. Looking ahead, we see industrial yields sharpening as investor confidence returns to real estate. But outperformance will be generated by investors capturing reversion, by stock picking, and by creating polarisation in performance through quality.

Retail

The retail sector is enjoying high relative income returns. As capital value growth has shifted into positive territory, returns over the second quarter were a healthy 2%. Over the first half of the year, capital growth was slightly positive at 0.1%, much improved from 2023’s value of -5.7%. Importantly, this performance is not exactly broad based. Total returns over the second quarter varied, from outperforming retail warehouses (3.1%) and supermarkets (1.8%), to less favourable standard shops (0.8%) and shopping centres (1.0%).

Consumer confidence has improved since the throes of the pandemic. Despite some monthly wobbles, retail sales have improved over 2024 to post 2.5% year-on-year growth in September. The outperformer here was food retailers, which have been robust in their trading figures over 2024; except for Asda, which continues to struggle. As real wages improve, the retail sector should see more optimism.

The retail sector’s landscape is working to absorb shifting consumer preferences inclusive of ecommerce and experiential shopping trends. Retail parks and select prime high-street retail are seeing strong leasing demand, while dwindling construction and conversions to alternative uses reduce existing stock. As such, London’s Bond Street and Oxford Street have renewed interest from investors, particularly family offices and cross-border capital, who are keen to pay competitive yields. Meanwhile, retail parks have a strong pull with institutional investors who are attracted by re-based yields on parks with a bias towards value retailers.  

Living

The private rented sector (PRS) has been in the news of late, given the Labour government’s commitment to revitalising the UK’s housing market and the launch of the Renter’s Rights Bill. According to Realyse data, rents across the UK increased by 6.3% over the year to August 2024, down from 11.3% in August 2023. The abrdn real estate research team was already forecasting a moderation in rents for the PRS, largely because of affordability constraints. Importantly, rents are expected to grow from here as inflationary pressures ease and real wages remain in positive territory. Demand continues to comfortably outstrip supply, which remains constrained. 

It’s unlikely that we will soon see any material rebound in supply, given prohibitive construction and financing costs. This is shown by the amount of build-to-rent (BtR) stock under construction, which has slowed by 19% over the past year. Given the more positive economic sentiment of late and the anticipation of further rate cuts from the BofE, we would expect these pressures to ease, resulting in more construction starts. Overall, we view the BtR asset class favourably. It’s maturing in the UK and serves an incredibly important role in addressing the shortfall in housing provision.

Purpose-built student accommodation has also made headlines, as supply constrained markets have seen meteoric rental growth. When digesting this segment, the impact of higher- versus lower-tariff universities  on accommodation performance must be considered. The latest data from the Universities and Colleges Admissions Service (UCAS) demonstrates that while applications for higher-tariff universities have grown by 7.8% for the 2024/25 academic year, lower-tariff university applications declined by 4%. To minimise risk, appropriate stock tied to strong universities has quickly become a target model for institutional investors.

Outlook for risk and performance

UK real estate seems to have taken the initial tailwinds of economic momentum in its stride as sentiment towards the sector improves. Investors have largely sat on the sidelines, awaiting further evidence of rate cuts from the BofE. With the bulk of the correction behind us and economic conditions improving, we see capital more actively seeking to allocate to UK real estate. Competitive tension is returning for prime assets in favoured sectors. With financing costs remaining prohibitive at present, current market conditions favour equity-backed buyers for UK real estate. 

Sector bifurcation is still very relevant to expected performance, even as we expect the market to shift into gear. Notably, offices face structural problems outside of the relatively small proportion of best-in-class assets. The industrial and logistics, residential, and retail warehouse sectors will shine, given their thematic and structural drivers. We also see the ‘other’ segment performing well, driven by robust hotel fundamentals. 

Given the UK’s headroom in economic policy compared with its peers, we see the BofE remaining cautious. There is an upside risk of swifter cuts from the second half of next year. Taking this possibility into account, we are forecasting a front-loaded return profile on the basis of large inward yield shifts.

Risk warning

The value of investments, and the income from them, can go down as well as up and an investor may get back less than the amount invested. Past performance is not a guide to future results.

Remember a bad plan is still better than no plan because without a plan you have no end destination.

When investing your hard earned the final destination is your income when your retire, what ever age that is in your plan.

The only way to have an end destination is to have a dividend re-investment plan, you may not know the exact end figure but you can pencil in some figures with a high degree of certainity.

The Snowball’s current ten year plan is income of £16,519 or an income on 100k invested of 16% per year.

The other end destinations for a Total Return plan.

Buy an annuity which could be any percentage you want to include.

Remember if your retire at the wrong time, the following annuity might be offered:

Canada Life figures show the 65-year-old with a £100,000 pension pot could buy an annuity linked to the retail price index (RPI) that would generate a starting annual income of £3,896. That’s up from £2,195 in the New Year following a 77% spike in rates this year.
Oct 22.

You have to surrender your capital so not an option for me.

An alternative would be to buy UK gilts and as long as you buy near or below the redemption price they are risk free if you hold to maturity. Current yield around 4.5% but you keep your capital to pass on to your nearest and dearest.

The other option is to use the 4% rule where you withdraw 4% of your capital and hope that the cash fund doesn’t expire before you do. You need a cash buffer for when the next market crash occurs.

The remaining funds could be passed on to your nearest and dearest.

Like life it’s a gamble.

For anyone making a plan, you could include both income and Total Return, switching into income as you get closer to retirement.

Lifestyling has proved to be a disaster for many, especially with compound growth you will make more money in the last few years, with a dividend re-investment plan, than in all the early years.

Strategy

A new Jerusalem

Dividend increases and share buybacks are good news for UK equities according to our analysts – who think those dark Satanic mills could deliver world-beating total returns..

Josef Licsauer

Disclaimer

This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. This material should be considered as general market commentary.

What if the UK market isn’t the forgotten backwater of global investing but instead the hidden realm where the next total return champions are quietly being forged? Picture an arena of dividends, buybacks, and capital growth, combining in a powerful alchemy, creating opportunities for those bold enough to seize them.

Sure, the UK is often labelled as a home to sluggish and out-of-favour industries, comprised of stocks that are overshadowed by the glittering tech titans across the Atlantic. But we think such labels fail to capture the dynamism simmering beneath the surface. Clinging to these perspectives risks overlooking a trove of undervalued and resilient opportunities, waiting for their moment to seize the gladiator’s rudis—the ultimate recognition of victory in the total return arena.

In this article, we examine how shifting market dynamics are reshaping the UK as a playground for total return strategies. Most importantly, we also highlight the investment trusts that have proven themselves in the heat of battle—armed not with shields and swords, but with disciplined strategies, attractive income and share buyback profiles, and a keen eye for uncovering value in a market brimming with potential.

Time to shift perceptions?

It’s no secret that UK valuations are languishing at historic lows relative to the US, with returns trailing far behind their transatlantic counterparts. This disparity has driven waves of capital outflows from the UK in recent years, as investors have chased the stellar performance of US tech giants. Simultaneously, we believe that many investors have also sought refuge in higher-yielding bonds and savings accounts amid elevated interest rates and economic uncertainty.

But history has shown, time and time again, that adversity often plants the seeds of opportunity for those willing to look beyond short-term market pessimism. One can’t help but draw on Warren Buffett’s timeless adage, be fearful when others are greedy and be greedy only when others are fearful. With UK equities overlooked and undervalued, could now be the time to embrace them?

Catalysts of change

Beneath the surface lies a diverse tapestry of resilient businesses that are benefitting greatly from the UK’s evolving dynamics. Many UK companies showcase strong fundamentals and a proven capacity to endure challenging macroeconomic conditions. We think that in many cases, not all, depressed valuations are less of a reflection of poor management or flawed business models but rather the result of prolonged economic headwinds.

One common critique of the UK market is its perceived lack of capital growth potential, even considering today’s valuations. There’s some truth to this, especially when comparing UK companies to their US equivalents. However, the tide may be turning. Key market fundamentals are showing improvements, as shown below, with stronger return on equity and reduced leverage, pointing to companies with greater profitability and healthier balance sheets. If this persists, the UK could be prime for a re-rating, as investors awaken to the long-term opportunities.

MARKET METRICS: FTSE ALL-SHARE

	current roe %	ten-year roe average	current net debt/ebitda (X)	ten-year net debt/ebitda average
FTSE All-Share	10.2	9.0	1.0	1.4

Source: Bloomberg, as of 15/01/2025

But here is where we think things get particularly compelling. The UK market is not only undervalued and showcasing improving fundamentals but it’s also energised by transformative catalysts, which could unlock significant value without the need for a flood of new capital. One such catalyst is the heightened corporate takeover activity, fuelled by depressed valuations that have transformed UK companies into attractive acquisition targets for international buyers. In 2024 alone, British firms worth £145bn were acquired—over half involving foreign entities. By year-end, deal activity had jumped 21% compared to 2023, underscoring the growing recognition of the UK’s undervalued potential. Many of these takeovers occurred at a premium to prevailing share prices, delivering, in some cases, substantial share price growth—a vital slice of the total return pie.

Building on this momentum, and chief among the catalysts, in our view, is the rise in buyback activity. Over the past year, nearly half of UK companies repurchased shares—the highest percentage among global markets. We think this is a clear signal that companies themselves recognise their undervaluation and are taking proactive steps to enhance shareholder returns. When executed at valuations below intrinsic value, buybacks can amplify shareholder returns, complementing the traditional income generated through dividends.

We think NatWest and Shell are prime examples. Over 2022 and 2023, NatWest repurchased approximately 10% of its shares whilst distributing dividends equivalent to about 12% of its market capitalisation. Shell, meanwhile, repurchased around 20% of its shares and paid dividends equivalent to roughly 10% of its market capitalisation. Together, these actions have delivered substantial value to shareholders in just two years—roughly 22% of market value for NatWest and 30% for Shell, or c. 11% and 15% annualised. Other players in the UK market, such as BP, Standard Chartered, and Barclays, echo this trend, embracing similar buyback and dividend strategies, helping support rising share prices in recent years. But for now, the two cases below help illustrate how buybacks and dividends can work harmoniously to deliver meaningful value to shareholders.

RETURNS TO SHAREHOLDERS

uk company	Two-year dividend paid (ex-special) (%)	Two-year share buyback return (%)	Two-year cash shareholder yield (%)
NatWest	12.3	10.1	22.4
Shell	10.0	19.7	29.7

Source: NatWest and Shell latest annual report 2023, Kepler calculations (two-year period covering 2022 & 2023).

Together, these catalysts unveil a market rich with opportunity, and several UK-focussed investment trusts are already reaping the benefits by backing UK companies leading the charge on delivering shareholder returns. Take CT UK High Income (CHI) . Manager David Moss views the current environment as a pivotal moment for the banking sector as many are now generating low to mid-teen returns on equity and rewarding shareholders with growing dividends and buybacks. Growing conviction here has prompted him to build up notable positions in the likes of NatWest (3.7%) but also HSBC (6.6% at the time of writing), attracted by their robust dividend profiles, share buyback programmes, and strong market positions.

Similarly, the broader energy sector is proving its potential. Managers like Imran Sattar of Edinburgh Investment Trust (EDIN) and Ian Lance and Nick Purves of Temple Bar (TMPL), know that whilst oil companies often face broader scrutiny, Shell is standing out for its evolving approach to the energy transition, as well as boasting a strong market position, attractive yield, and robust free cash flows. When combined with its disciplined capital allocation, which has driven high and growing returns to shareholders, these qualities have made Shell a key holding for both, with a 7.0% position in EDIN’s portfolio and a 5.8% in TMPL’s, as its current shareholder-focussed strategy and growth prospects align with their total return ethos.

Champions of the total return arena

Investment trusts, as listed companies themselves, face many of the same pressures, challenges, and tailwinds as the businesses they invest in. When they buy back their own shares, the accretion to NAV is very easy to calculate (much more so than is the case with operating companies), adding another dimension to the measurable cash return to shareholders. Below we show how many shares have been bought back by each trust in the AIC UK equity income sector over the past three years (to 10/01/2025). We also show the percentage of market cap bought back.

AIC UK EQUITY INCOME SECTOR: BUYBACK RETURN

UK equity income trusts	Total share buybacks (in £)	Three-year buyback return (as a % of market cap)
FGT	518,074,060	25.8
EDIN	132,232,272	12.1
TMPL	75,097,811	9.7
BRIG	2,524,076	6.1
JCH	27,209,686	6.0
MUT	37,771,499	3.6
SHRS	2,579,981	3.1
LOW	7,321,020	2.0
CTY	8,478,035	0.5
CTUK	1,476,000	0.4
DIG	526,833	0.1
SCF	123,526	0.1
LWDB	212,875	0.0
AEI	N/A	0.0
CHI/CHIB	N/A	0.0
DIVI	N/A	0.0

Source: Morningstar, Kepler calculations (data range 10/01/2022 to 10/01/2025). N/A – trusts that didn’t initiate a share repurchase over the period (share redemption and additional listing corporate action types have been excluded).

Below we take it a step further by annualising each trust’s buyback return over three years and combining it with their historic dividend yields to give a rough idea of the potential total cash return on offer. This reveals several trusts putting forward a strong case to be considered total return champions. We stress that this approach isn’t a precise calculation—due to market variables and the fact that trust boards may alter their policies moving forward— but we think it provides a useful indication of which trusts, relative to their size, offer the highest all-in cash “yield”, or total cash return as we refer to it below.

RETURNS TO SHAREHOLDER

UK equity income trusts	Annualised three-year buyback return (%)	Historical yield (%)	Total cash return (%)
FGT	8.0	2.2	10.2
EDIN	3.9	3.7	7.6
SHRS	1.0	6.0	7.0
JCH	1.9	5.0	6.9
TMPL	3.1	3.5	6.6
MUT	1.2	4.7	5.9
LOW	0.7	5.1	5.8
CTY	0.2	4.8	5.0
BRIG	2.0	2.5	4.5
CTUK	0.1	3.9	4.0

Source: Morningstar, as of 10/01/2025

Finsbury Growth & Income (FGT) – amplifying shareholder returns

FGT stands out in the UK equity income sector for its focus on quality growth companies and a concentrated portfolio of just 23 holdings. Its 8.0% annualised three-year buyback return leads the group, complementing a lower dividend yield of 2.2% to deliver a total cash return, based on our rough calculations, of 10.2%—the highest among peers. This high buyback return reflects FGT’s commitment to its discount control mechanism, which aims to ensure shares trade within a range of a 5% discount to a modest 2% premium. Combined with the defensive and compounding nature of its portfolio, FGT offers investors a compelling mix of capital growth and incremental shareholder value.

Edinburgh Investment Trust (EDIN) – quality focus, steady returns

Based on our workings, EDIN’s total cash return of 7.6% reflects a 3.7% historical yield and 3.9% annualised buyback return. Whilst its yield is more modest compared to some peers, EDIN has built a steady track record of reliable income and capital growth, alongside a strong commitment to share buybacks. Under the leadership of Imran Sattar, the trust has focusses on high-quality, cash-generative companies with strong growth potential and competitive advantages, positioning it for both income generation and long-term capital appreciation.

Despite trading at a higher price-to-earnings (P/E) ratio than the index, the emphasis Imran places on profitability and growth prospects supports its superior long-term performance potential. Additionally, the focus on companies with lower debt also provides added resilience in times of market stress, helping the trust navigate challenging periods, including rising interest rates, with greater financial stability. Combining robust dividend growth and an attractive buyback strategy, EDIN remains a reliable option for income and growth-focussed investors.

Shires Income (SHRS) – punching above its weight

Despite being smaller in size compared to some of its peers, with a market cap of around £127m, SHRS has consistently returned value to shareholders through buybacks, annualising 1.0% over the past three years, according to our rough indications, on top of its already generous 6.0% historical yield. Additionally, we also think SHRS’s high, yet growing dividend, benefits from its unique income strategy. The trust’s allocation to preference shares offers stability and predictability to its yield, whilst its ability to invest in small- and mid-cap businesses strikes a strong balance between current income and future growth potential. SHRS’s inclusion on the AIC Dividend Hero list further reinforces its commitment to consistent income, distinguishing it as a reliable option for income-focussed investors.

JPMorgan Claverhouse (JCH) – all-cap income in action

JCH takes a more income-focussed approach than some peers in the sector. It has consistently returned value to shareholders through buybacks, annualising 1.9% over the past three years, on top of its already generous 5.0% historical yield, one of the highest in the group. The change in the management team has introduced a refreshed strategy, embracing a “genuinely all-cap approach” and rethinking income exposure by diversifying into mid-cap companies with strong dividend growth prospects and a three-bucket yield strategy which prioritises income stability and growth. Moreover, JCH boasts a 51-year dividend growth track record and significant reserves, which we argue places JCH as a strong option for both reliable income and consistent growth potential.

Temple Bar (TMPL) – focussed value delivery

TMPL disciplined value investing approach prioritises businesses offering attractive valuations, strong cash generation, and sustainable dividend growth, a combination which helps the portfolio deliver both resilience and upside potential, even in challenging market environments. TMPL’s total cash return of 6.6% reflects this disciplined approach, balancing a solid historical yield of 3.5% with a 3.1% annualised buyback return. TMPL’s managers are advocates of the power of total returns, consistently highlighting the importance that both buybacks and dividends can have to shareholder returns over time.

Over the last three years, the board has shown a clear commitment to returning value to shareholders and putting its strategy into action. Whilst its dividend yield is lower than some peers, TMPL’s focus on undervalued opportunities with strong recovery potential, alongside its commitment to added additional returns through buybacks, remains a core attraction for long-term investors, further enhancing its appeal, in our view.

What about smaller companies?

We’ve focussed much of our attention on trusts that invest predominately in larger companies. However, when it comes to smaller companies, we think they often fly under the radar. Some investors might assume that smaller companies sacrifice income potential for capital growth potential—or vice versa. Whilst this can be true for some, many smaller businesses offer the best of both worlds: strong, rising income alongside impressive capital growth.

Trusts that specialise in smaller companies recognise this potential, offering investors a differentiated source of total returns not often seen in large-cap stocks. Aberforth Smaller Companies (ASL) is a prime example. Although ASL does not explicitly target income, it has consistently demonstrated its ability to provide a solid yield of 3.0%, with annualised dividend growth of 7.4% since inception. This growth has outpaced inflation (2.5%) and surpassed both small-cap and broader market indices. Additionally, ASL has returned value to shareholders through share buybacks, annualising 1.0% over the past three years, bringing its total cash return to 3.9%.

In the first half of 2024, fourteen of ASL’s holdings repurchased shares, with boards taking advantage of depressed stock market valuations. This activity highlights the catalysts we discussed earlier are prevalent across the UK market-cap spectrum.

ASL’s commitment to buybacks and conservative approach to income management, supported by significant revenue reserves, strengthens its ability to sustain and grow its dividend. In addition to its regular dividend, ASL has also paid special dividends, though these are not guaranteed. Overall, its blend of value-driven capital growth, a rising income stream, and buyback activity underscore it as a compelling option for those looking for UK smaller company exposure, with strong total return potential.

Conclusion

The UK market, long overlooked and undervalued, is positioning itself as an unexpected powerhouse for shareholder returns. Beneath its seemingly stagnant surface, a battle of transformative catalysts—corporate takeovers, rising buybacks, and resilient businesses—is quietly reshaping the landscape. These dynamics are forging a new breed of total return champions for those willing to look beyond short-term pessimism.

The synergy between buybacks and dividends presents a potent formula for total returns, uniquely suited to the UK’s current valuation landscape. Buybacks not only signal management’s confidence in undervalued businesses but also enhance shareholder value by reducing share count and increasing earnings per share, delivering welcome additional returns in today’s current environment. We should acknowledge here, that the economics of buybacks are not quite the same for trusts as for commercial companies. Shell will generally not be selling oil fields to buy back shares, but one way or another, an equity income trust will be selling equities to buy back shares. This means the compound effect on EPS over time is much higher for a commercial company. That said, trust buybacks do boost NAV per share and have some positive effect on EPS too. Considering these payments and robust dividend payouts, we think investors are well-placed to benefit from both the immediate income and amplified long-term gains the UK has to offer.

UK-focussed investment trusts are capitalising on these evolving dynamics and harnessing their structures and expertise to deliver tangible results for investors, in our view. For those with a long-term perspective, the UK’s once-overlooked market is poised for transformation — potentially as a coliseum ready to crown the next generation of total return champions.

Story by Stephen Wright

Worried about UK stagflation ? Consider buying dividend shares

Earning passive income from dividend shares is nearly never a bad idea. But with the UK at risk of stagflation, now might be an especially good idea for investors to take a look at what’s on offer.

Beating stagflation?

Like the witches in Macbeth, or the ghosts of A Christmas Carol, bad things often come in threes. So it is with stagflation, with the aforementioned mix of sluggish growth, inflation, and elevated unemployment.

The latest fear for the UK is that this might be an unwelcome consequence of the Budget. A big part of this was increases to the National Living Wage and National Insurance contributions for employers.

The worry is this might deter investors (leading to low growth). At the same time, businesses could respond by raising prices (leading to inflation) and cutting jobs (leading to unemployment).

That’s not great, but investors can’t do much about this. What they can do however, is figure out which stocks to consider buying to protect themselves in such an environment. 

Dividends

Shares in companies that can distribute cash to investors in the form of dividends can be attractive in a stagflationary environment. Especially if they can do so consistently. 

I think real estate investment trusts (REITs) are a good example. These are firms that own properties and generate rental income by leasing them to tenants and distributing the cash to investors.

In general, REITs don’t participate much in a growing economy. That’s because tenants don’t suddenly decide to start paying more on their rent just because profits are rising. 

The other side of that coin though, is that they don’t pay less when growth falters. And that can make REITs more resilient than other stocks when things are tougher. 

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.

Supermarket Income REIT

One example is Supermarket Income REIT (LSE:SUPR). Right now, the stock has a dividend yield of almost 9%, so there’s a real return on offer for investors even if inflation does start to move higher.

Around 75% of the company’s rent comes from Tesco and J Sainsbury. That’s a risk, since it means the business might not have the strongest hand when it comes to negotiating new leases.

It’s worth noting though, that less than 1% of the current leases expire in the next five years. So Supermarket Income REIT should have a decent way to run before it has to get into this issue. 

Long-term investing

I’m not going to buy Supermarket Income REIT or any stock just because of what the economy might do in the next few months or years. But I do think it’s an important consideration. 

One of the benefits of a diversified portfolio is it limits the effect of specific risks. Stagflation is one of these, so I think long-term investors can legitimately look for stocks that offer protection from this.

The post Worried about UK stagflation? Consider buying dividend shares appeared first on The Motley Fool UK.

The cost of living crisis shows no signs of slowing… the conflict in the Middle East and Ukraine shows no sign of resolution, while the global economy could be teetering on the brink of recession.

Whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times. Yet despite the stock market’s recent gains, we think many shares still trade at a discount to their true value.

More reading

Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended J Sainsbury Plc and Tesco Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Dividend Declaration

Residential Secure Income plc (“ReSI)”, or the “Company“) (LSE: RESI), which invests in independent retirement living and shared ownership to deliver secure, inflation-linked returns, is pleased to declare an interim dividend of 1.03 pence per Ordinary Share to be paid in the financial year to 30 September 2024.

The full 1.03 pence of the dividend will be paid as a Property Income Distribution (“PID“) in respect of the Company’s tax-exempt property rental business.

This dividend will be paid on 21 February 2025 to Shareholders on the register as at 31 January 2025. The ex-dividend date is 30 January 2025.

ReSI intends to pay dividends to Shareholders on a quarterly basis and in accordance with the REIT regime.

Story by Mark Hartley

Aiming for passive income in 2025 ? Consider these 3 simple strategies

Creating a passive income stream is a common way to safeguard against unexpected financial troubles. Many UK residents are constantly on the look out for new ways to bring in extra cash.

With that in mind, here are three ways to harness this power in 2025.

Dividend stocks

One of the most popular methods of earning income from stocks is via dividends. These are regular payments companies deliver to shareholders as a reward for their loyalty. The yield is the percentage paid out per share. 

The amount varies and can be altered at any time depending on how well the business is performing. So it’s important to look for reliable companies with a long dividend track record.

For example, Vodafone recently cut its annual dividend from 9 cents to 4.5 cents per share. Whereas British American Tobacco has been increasing its dividend consistently for over 20 years.

Exchange-traded funds (ETF)

Recently, earning extra income by investing in ETFs has become more popular. These products provide a quick and easy way to get exposure to a wide range of stocks — often, an entire index.

For example, the iShares Core S&P 500 ETF has delivered annualised returns of 12.66% over the past 10 years. The fund attempts to beat the overall performance of the S&P 500 by weighting each stock based on market cap.

Investment trusts

Like an ETF, an investment trust provides exposure to a range of stocks. However, it’s usually a much smaller and more focused selection based on a goal like income or growth.

The advantage of an investment trust is that the hard work is taken care of. Rather than try to analyse stocks and balance a portfolio themselves, investors can leave that up to the fund manager.

However, this service incurs an ongoing fee, typically between 0.5% and 1%. This needs to be factored into the expected return. 

For example, the City of London Trust (LSE: CTY) maintains an yield of around 6%. It’s been paying and increasing its dividend consecutively for over 50 years. While past performance doesn’t indicate future results, it provides some peace of mind.

The trust is focused on British income stocks like HSBC, Shell, and RELX. Its ongoing charge is 0.37%.

While the fund is worth considering for dividend income, it isn’t highly diversified. Consequently, if the UK market dips, the trust falls with it. The share price is down 0.9% in the past five years because high inflation has hurt the UK economy. As such, it’s returned no more than the dividend payments. This is an ongoing risk that could hurt the fund’s performance if inflation rises again.

When picking stocks, investors should always consider the company-specific risks. Fortunately, companies typically provide guidance along with their interim results, helping investors to make informed decisions.

The post Aiming for passive income in 2025? Consider these 3 simple strategies appeared first on The Motley Fool UK.

Story by Mark Hartley
MotleyFool

Frustrated young white male looking disconsolate while sat on his sofa holding a beer© Provided by The Motley Fool

Dividend stocks are a popular way to earn passive income on the stock market. The regular payments made to shareholders can equate to a decent flow of cash.

When investing in dividend shares, early investors often fall foul of some common mistakes.

Here are two to keep in mind.

Not all companies are created equal

There’s no shortcut when picking dividend stocks and no single model that applies to all companies. When considering investing for dividends, the individual strengths and weaknesses of each company must be accounted for.

This is particularly true when it comes to dividend coverage. This metric is used to assess how much cash the company has to cover its dividend obligations. Presumably, if its cash is less than the full amount of dividends, there’s going to be a problem.

Companies that need steady cash flow to operate typically pay a low dividend and as such, have high coverage. However, some companies don’t need much cash to operate and so pay a high dividend with low coverage. This reveals how low coverage isn’t necessarily a bad thing.

It’s important to find out how the company operates before making a decision based solely on coverage. Even a company with high coverage may cut the dividend if it has a lot of debt to finance.

These factors differ from company to company, so each one needs to be assessed on an individual basis.

Investing for the yield

Investing purely for the yield isn’t a good long-term strategy. Yields fluctuate wildly and are often high for the wrong reasons, such as a crashing price. 

Some investors buy stocks just before the ex-dividend date as a way to lock in a yield at a certain level. This can be a smart strategy but doesn’t guarantee anything. Ignoring the company’s fundamentals and potential price movements is risky. If the stock falls more than the yield before payment, then it’s all for nothing. 

Before making a decision based on the yield, investors should always carefully assess the company’s financial position