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BlackRock
Updated 26 May 2023
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Disclaimer

This is a non-independent marketing communication commissioned by BlackRock. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.

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.

There was a significant change in the income landscape in 2022. Higher interest rates meant that for the first time in a decade, bonds now pay an income comparable to that available from company dividends. This creates a greater hurdle for equity income investors, but we still see real value in choosing stock markets for income.

Inflation has been the big story of 2022. For much of the year, inflation surprised financial markets with its depth and breadth, outpacing the expectations of central banks.1 It has been fuelled by rising commodities prices, resilient demand, supply chain constraints and, increasingly, rising wages.

For those investors who rely on the income they receive from their investments, this presents a dilemma. Their income may be the same, but it is less valuable. While it is easy to dismiss this as a temporary phenomenon, it seems increasingly clear that inflation may settle at a higher level. The BlackRock Investment Institute says: “We expect inflation to cool but stay persistently higher than central bank targets of 2%...We see long-term drivers of the new regime such as aging workforces keeping inflation above pre-pandemic levels.”2

Inflation protection

Holding dividend-paying equities can help protect an investor’s income against the damage caused by inflation. With bonds, the income is usually fixed. It will stay static over the lifespan of the bond. This means bonds are likely to become less valuable at a time of rising inflation.

Fixed income risk: Two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to repay the principal and make interest payments.

In contrast, companies may be able to pass on cost increases to their customers during periods of rising prices. This can help dividends keep pace with inflation. In the fourth quarter of 2022, UK dividends rose 8% to £94.3bn on a headline basis, 3 according to the Link UK Dividend Monitor Q4 2022, and the group expects dividends to grow again in 2023.

It is possible to underestimate the power of this growing income at times when inflation is benign, but as the world enters a period of structurally higher inflation, it may prove more important.

Investment trusts have a particular advantage in protecting dividends in line with inflation. They can reserve income during buoyant periods and pay it out during more difficult periods. The BlackRock Income & Growth Investment Trust currently has revenue reserves, which allowed it to maintain its dividends to investors during Covid and pay a rising income over time.4

The long-term growth of stock markets

Building long-term wealth is difficult. It is an uncomfortable truth that many people don’t save enough to ensure they have financial security. Historically, returns from the stock market have outpaced those from bonds or cash, albeit with greater volatility in between.

The periodic drawdowns in equity markets can be a deterrent and may add to the appeal of fixed income investments. However, 2022 proved that even ‘safe’ bond markets are not immune to falls in capital. Equally, by focusing on high quality companies – I,e, those companies that are cash generative, with strong balance sheets and experienced management teams, it may be possible to manage some of the volatility associated with stock markets. There are companies that can thrive, even in tough environments.

Equity risk: The value of equities and equity-related securities can be affected by daily stock market movements. Other influential factors include political, economic news, company earnings and significant corporate events.

Flexibility

2022 has thrown up a lot of challenges. The world has entered a phase of more volatile geopolitics, while the UK has had to contend with its own domestic instability. The BlackRock Income & Growth Investment Trust maintains a flexible style avoiding a particular sector or style bias: over the year, we increased our exposure to the resources and power sectors in the trust in response to rising energy costs, we also increased our weighting in non-UK companies, providing a degree of diversification and additional sources of income.

Diversification risk: Diversification and asset allocation may not fully protect you from market risk.

Dividends are not bonds, and will change in response to rising or falling profitability, but by finding those companies with sound cash flows, a strong market position, pricing power and robust earnings, it may be possible to sustain a growing income over time.

1 https://www.imf.org/en/Blogs/Articles/2022/08/01/blog-soaring-inflation-puts-central-banks-on-a-difficult-journey-080122 - IMF, 8 February 2022

2 https://www.blackrock.com/corporate/literature/whitepaper/bii-global-outlook-2023.pdf - BlackRock 2023 Outlook

3 https://www.linkgroup.eu/insights/publications/uk-dividend-monitor-q4-2022/ - LINKGroup: UK Dividend Monitor Q4 2022, Q4 2022

4 https://www.blackrock.com/uk/literature/annual-report/blackrock-income-and-growth-investment-trust-plc-annual-report.pdf - BlackRock 31 October 2022

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

Counterparty Risk: The insolvency of any institutions providing services such as safekeeping of assets or acting as counterparty to derivatives or other instruments, may expose the Fund to financial loss.

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.

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.

Important Information

In the UK and Non-European Economic Area (EEA) countries: this is issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: + 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock.

This document is marketing material. The Company is managed by BlackRock Fund Managers Limited (BFM) as the AIFM. BFM has delegated certain investment management and other ancillary services to BlackRock Investment Management (UK) Limited. The Company’s shares are traded on the London Stock Exchange and dealing may only be through a member of the Exchange. The Company will not invest more than 15% of its gross assets in other listed investment trusts. SEDOL™ is a trademark of the London Stock Exchange plc and is used under licence.

Net Asset Value (NAV) performance is not the same as share price performance, and shareholders may realise returns that are lower or higher than NAV performance.

The investment trusts listed in this document currently conduct their affairs so that their securities can be recommended by IFAs to ordinary retail investors in accordance with the Financial Conduct Authority’s rules in relation to nonmainstream investment products and intend to continue to do so for the foreseeable future. The securities are excluded from the Financial Conduct Authority’s restrictions which apply to non-mainstream investment products because they are securities issued by investment trusts. Investors should understand all characteristics of the funds objective before investing. For information on investor rights and how to raise complaints please go to https://www.blackrock.com/corporate/compliance/investor-right available in local language in registered jurisdictions.

Any research in this document has been procured and may have been acted on by BlackRock for its own purpose. The results of such research are being made available only incidentally. The views expressed do not constitute investment or any other advice and are subject to change. They do not necessarily reflect the views of any company in the BlackRock Group or any part thereof and no assurances are made as to their accuracy.

This document is for information purposes only and does not constitute an offer or invitation to anyone to invest in any BlackRock funds and has not been prepared in connection with any such offer.

© 2023 BlackRock, Inc. All Rights reserved. BLACKROCK, BLACKROCK SOLUTIONS and iSHARES are trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.

ID: MKTGH0423E/S-2765310

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