Questor is The Telegraph’s stockpicking column, helping you decode the markets and offering insights on where to invest.
The income investing landscape is in the midst of major change. Although inflation is widely expected to remain above the Bank of England’s 2pc target for longer, due in part to the impact of the October Budget, it should still be low enough for further interest rate cuts to be implemented over the coming months.
A brisk unwinding of restrictive monetary policy is set to prompt a dwindling of the income return available on cash – and while bond prices should benefit from monetary policy easing due to their inverse relationship with interest rates, the fixed nature of their income return means holders will fail to directly benefit from any subsequent improvement in the economy’s performance.
Conversely, the pace of dividend growth is likely to be catalysed by interest rate cuts that prompt a faster pace of GDP expansion. With a range of FTSE All-Share income stocks offering relatively attractive yields at present, investors do not yet seem to have priced in their increasingly ebullient outlook.
Therefore, in Questor’s view, dividend-paying stocks continue to offer the most attractive risk/reward opportunity for long-term income seekers.
One way of accessing a diverse range of them is via an investment trust, such as FTSE 250-listed Temple Bar, which has a dividend yield of 3.9pc based on its shareholder payouts over the past 12 months. The FTSE All-Share Index, which serves as the trust’s benchmark, yields 3.4pc.
The company trades at an 8pc discount to net asset value, which suggests it offers good value for money. Given that its share price has risen by 39pc over the past three years, versus a 19pc gain for the FTSE All-Share Index, it also has a solid track record of benchmark outperformance.
This is not particularly surprising given it seeks to deliver capital growth as well as a rising income. To this end, it invests in high-quality stocks, such as those with solid financial positions and strong cash flows, that temporarily trade below their intrinsic value.
This strategy neatly dovetails with Questor’s value investing approach, with several of the company’s holdings previously tipped over recent months.
The trust’s major holdings include well-known firms such as BP and Marks & Spencer, in what is a UK-focused portfolio that is somewhat concentrated. The trust has 34 holdings in total, with its 10 largest positions contributing around 48pc of total assets.
This could mean that its share price performance is relatively volatile, given its dependence on a rather limited number of positions.
However, with the FTSE All-Share index’s 10 largest constituents accounting for 39pc of its total market capitalisation, this column is not unduly concerned about the trust’s concentration risk.
Similarly, the company’s gearing ratio of 8pc represents an overall positive for its long-term prospects given the upbeat outlook for the UK stock market amid ongoing interest rate cuts.
Temple Bar’s holdings have together delivered solid dividend growth over recent years. In the past three financial years, for example, shareholder payouts have risen at an annualised rate in excess of 7pc.
Given that inflation is set to remain below 3pc this year before subsequently declining to the Bank of England’s target in the coming years, the trust appears to be well placed to generate positive real-terms growth in dividends.
As a result, it becomes the latest addition to our income portfolio. Its notional purchase will be funded in small part by existing cash from previous sales.
However, the bulk of its cost will be raised by the exit of Sequoia Economic Infrastructure Income Fund and that of Gore Street Energy Storage Fund from the portfolio. They were added in April 2020 and November 2020, respectively, and have produced capital losses of 23pc and 56pc.
While Temple Bar has not featured in our income portfolio until now, it has previously been tipped by Questor. Its shares have risen by 4pc since our original recommendation in November 2019, which is a rather disappointing result.
However, its wide margin of safety, solid strategy and an upbeat dividend outlook for many of its holdings mean that it offers a favourable risk/reward opportunity for income-seeking investors.
Questor says: buy
Ticker: TMPL
Share price: 276.5p
Read the latest Questor column on telegraph.co.uk every weekday at 5am. Read Questor’s rules of investment before you follow our tips.
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