Based on a qualitative assessment of 16 criteria, Kepler will be assigning an ‘orb’ scale of one to five based on the attractiveness and sustainability of a trust’s income credentials.
Features such as dividend growth, dividends paid, capital growth, total return, revenue reserve, yield and volatility will be measured with three degrees of weight attached to each.
The group said it believes closed-ended funds’ ability to smooth dividends makes them the “vehicle of choice” for income seekers.
Noting the Investment Association’s recent decision to reduce the “somewhat arbitrary” yield requirement of its UK Equity Income sector, Kepler said measuring yield in isolation was “naïve”.
As yield is calculated as the previous year’s dividend divided by the current share price – and therefore subject to fluctuations – it “gives little indication” as to the amount of income an investor is likely to receive.
Research analyst Alex Paget said: “It is increasingly dangerous in areas such as UK equity income where many popular mega-cap stocks have very, very high yields, but whether or not they will actually pay that ‘yield’ is a completely different question given falling earnings growth and next to no revenue reserve cover.”
For example, the yield across the FTSE 350 to end December 2016 may appear relatively attractive at 3.6% – but he called the level of dividend cover “worryingly low” at less than 1x.
Paget added: “These are the first actual income ratings available to UK investors, meaning that just because a trust has a low rating, it doesn’t make it a poor investment.
“Indeed, some of the worst performers in this rating system have been among the best from a total return point of view, but the Kepler Income Ratings are designed to highlight trusts which serve a very specific purpose; to generate a real, dependable income without sacrificing capital, with a predictable trajectory.”
