# Resilient income in tough times

- Link: https://www.directorstalkinterviews.com/resilient-income-in-tough-times/412846515
- Published: 2020-07-28T09:10:53+01:00
- Author: Giles Arbor

**David Goldman and Adam Avigdori, Co-Managers of the BlackRock Income and Growth
Investment Trust plc, believe these are tough times for dividend seekers in the 
UK, but active management can help navigate this difficult environment.**

**Capital at risk. **The value of investments and the income from them can fall 
as well as rise and are not guaranteed. Investors may not get back the amount originally
invested.

These have been uncertain times for those who need an income from their investments.
Many companies have postponed or cancelled their dividend payouts in the wake of
the COVID-19 outbreak. The economic outlook remains uncertain even as the immediate
crisis has passed, with other issues such as US/China tensions and Brexit coming
to the fore once again.

In general, the companies in our portfolio have been more resilient in their payouts
than the market as a whole. Many have postponed dividends until their earnings situation
is clearer, but we remain confident that many will return to the dividend list. 
Our focus on stock selection has significantly helped the resilience of the portfolio.

**Free cash flow**

For us, it is vitally important that a business is able to generate cash consistently
over time. This dictates its ability to pay an attractive and growing dividend over
the longer term. Inflation-beating dividend growth is best achieved from companies
that are able to grow free cash flow.

If companies have high levels of free cash flow, they can reinvest back into the
business, ensuring long-term growth. Too many companies in the UK market pay dividends
at the expense of growth, or – worse still – from debt. We want to see companies
investing for the future. This should not be incompatible with paying a dividend.

**Selectivity**

Dividends are a promise from companies, not an obligation. There needs to be a willingness
to pay a growing dividend on the part of the management team. In the current environment,
they also need to be allowed to pay. We are seeing this today in the financial sector,
where banks and other companies have been prevented from making dividend payments,
either because of government intervention or because they have taken government 
support.

Selectivity is vital. We want companies with strong barriers to entry, with something
in the products and services they provide that differentiates them. This type of
business has been able to maintain and grow its dividend, some of them even through
the crisis. As it stands, we have a higher weighting in consumer goods and consumer
services. We like companies that can compound cash flow over time, and this is an
area where we find many stocks that meet our criteria.

**Investment opportunities**

This crisis and the dislocation in the market from the sell-off we saw in the first
quarter provided us with significant opportunities to buy high quality franchises
at lower valuations. Undoubtedly, some companies were hit hard by the crisis, but
often raising additional funds has provided the balance sheet support they have 
needed to get them through this challenging period. The key, though, is to invest
in those businesses with cyclical as opposed to structural problems; the former 
is likely to survive and could produce accretive returns for the portfolio, the 
latter will not.

More recently, the Board took the decision to allow up to 5% of the trust to be 
invested in companies listed outside the UK. There is a multitude of reasons why
we proposed to invest in international equities. Firstly, it allows us to access
attractive themes unavailable in the UK, to invest in more attractive international
competitors than their UK peers, as well to benefit from other yield enhancers for
the income of the portfolio.

**Environmental, social and corporate governance (ESG)**

[Sustainability](https://www.directorstalkinterviews.com/sustainability-green-stocks-news)
is a crucial consideration for us. We believe that ESG factors and practices are
intrinsic to a company’s long-term profitability, cash generation and risk profile.
Our fundamental research incorporates our assessment of ESG factors and trends, 
such as decarbonisation, as well as the risks and opportunities that result from
a company’s ESG practices. Our search for sustainable free cash flow leads us to
companies that account for ESG trends when allocating capital, promote sustainable
relationships with all their stakeholders and operate with clear processes to mitigate
risks.  

One big certainty for us is that post this crisis, the role and importance of ESG
will be enhanced. Already in meetings, and as a team, we have been in contact with
approximately 760 companies year-to-date, management and boards are far more aware
of their role in society and their ability to affect change. Even for those significantly
financially impaired like Whitbread are still embracing good behaviours by opening
up their empty hotels to house essential workers and NHS staff. Unilever has committed
a huge financial package of nearly US $500m in goods and cash to help deliver essential
items to places where it is needed most. They have also brought forward all their
payments to small or medium-sized enterprises (SMEs) to help them with working capital.
We expect that this crisis will deepen the corporate world’s role in their employees’
lives, in their communities and in society.

**Investment trust structure**

The investment trust structure adds flexibility in a crisis. For example, we have
used gearing – borrowing to invest – effectively during this crisis. We took gearing
lower in early 2020 because we were worried about market valuations, but have since
pushed it up to 4-5%, which may help with both dividend and capital growth.

The Board is committed to using the Trust’s reserves to support dividends to shareholders.
The Trust has one of the strongest reserves in equity income sector. We have built
this over time to ensure that we can sustain payouts to our shareholders during 
difficult times, just like the one we are experiencing today.

**Risk:** Reference to the names of each company mentioned in this communication
is merely for explaining the investment strategy and should not be construed as 
investment advice or investment recommendation of those companies.

This material is not intended to be relied upon as a forecast, research or investment
advice, and is not a recommendation, offer or solicitation to buy or sell any securities
or financial product or to adopt any investment strategy. Unless otherwise stated
all data is sourced from BlackRock as at July 2020.

**For more information on this Trust and how to access the opportunities presented
by the income and growth sector, please visit: [www.blackrock.com/uk/brig](https://www.blackrock.com/uk/individual/products/investment-trusts/our-range/blackrock-income-and-growth-investment-trust/trust-information?siteEntryPassthrough=true&cid=aff:investmenttrusts2020:brig:directorstalk:link)**

**Risk Warnings**

Past performance is not a reliable indicator of current or future results and should
not be the sole factor of consideration when selecting a product or strategy.

Changes in the rates of exchange between currencies may cause the value of investments
to diminish or increase. Fluctuation may be particularly marked in the case of a
higher volatility fund and the value of an investment may fall suddenly and substantially.
Levels and basis of taxation may change from time to time.

**Trust Specific Risks**

Liquidity risk: The Fund’s investments may have low liquidity which often causes
the value of these investments to be less predictable. In extreme cases, the Fund
may not be able to realise the investment at the latest market price or at a price
considered fair.

Gearing risk: Investment strategies, such as borrowing, used by the Trust can result
in even larger losses suffered when the value of the underlying investments fall.

**Important Information**

Issued by BlackRock Investment Management (UK) Limited, authorised and regulated
by the Financial Conduct Authority. Please refer to the Financial Conduct Authority
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The Company is managed by BlackRock Fund Managers Limited (BFM) as the AIFM. BFM
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shareholders may realise returns that are lower or higher than NAV performance.

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so that its securities can be recommended by IFAs to ordinary retail investors in
accordance with the Financial Conduct Authority’s rules in relation to non-mainstream
investment products and intends to continue to do so for the foreseeable future.
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which apply to non-mainstream investment products because they are shares in an 
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acted on by BlackRock for its own purpose. The results of such research are being
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