Each week, a professional investor tells us where he'd put his money. This week: Mark Barnett, Perpetual Income and Growth Investment Trust.
The UK equity market offers one of the most attractive levels of income of all global equity markets. However, this income has traditionally been generated by a concentrated mix of large-cap stocks. I seek to create a diversified portfolio of income-generating companies with the potential to grow those payments ahead of inflation over time. The ability of investments to generate sustainable free cash flow and the attitude of company management towards shareholder distributions is crucial to success. Fortunately, within the UK market, there are some very interesting areas of opportunity.
Domestic firms hit by Brexit
One area that offers evident value is real estate, where political uncertainty has placed significant pressure on valuations. Within this sector, NewRiver Reit (LSE: NRR) stands out. This real estate investment trust offers highly diversified income from retailers that are growing (discounters and convenience stores) and are relatively resilient to online challenge. Roughly one fifth of the portfolio is pubs, while the top-ten retailers account for less than 15% of NewRiver's rental income and there is virtually no exposure to department stores.
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Retailer Next (LSE: NXT) is another business operating within a Brexit-hit sector, while shares face the additional challenge of the pessimistic story around high-street retailers. However, the company is challenging this narrative. Next released encouraging full-year results in May that included a 15% rise in online sales evidence that the company's multi-channel offering allows it to see the growth of online shopping as an opportunity not a threat. Meanwhile, the increase in the annual dividend reaffirmed Next's focus on shareholder returns.
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