While this is well below the rate of inflation and the Bank of England base rate, it takes the heavy lifting out of the rest of the portfolio by essentially providing more than half of the around 7 per cent return required to beat inflation and returns on cash. Suddenly asking a portfolio to achieve 3 per cent capital growth does not appear quite so daunting.
The other benefit of this approach is the fact it keeps clients invested in the market and removes the reinvestment risk that comes when interest rates are eventually cut – cash rates will fall at the same time markets will likely rally, delivering a double blow to those sat on the sidelines.
Now, some might point to the fact that dividend allowances have been slashed to the point that tax drag makes this a difficult strategy to achieve. However, there remain multiple tax-efficient wrappers for clients to utilise to ensure this strategy pays as well as it can.
Pensions and Isas remain the most popular, but we are seeing further interest in onshore bonds thanks to their tax-efficient benefits across the board, including on dividends.
This market environment will not last forever, but while it does it is forcing advisers and portfolio managers to think creatively. The last thing any client needs is for inflation and tax to drain their capital needlessly.
While market diversification is hard to come by just now, there are options available to investors.
Big tech plays an important role in portfolios, but it does not have to be an all or nothing play. Dividends look a good diversifier just now and can be protected.
Lindsay James is investment strategist at Quilter Investors
