Healthy dividend outlook: fund tips for UK income investors
According to the latest UK Dividend Monitor from Capita Asset Services, headline dividends between April and June reached £29.2bn, the highest second quarter payout on record and a year-on-year increase of 13.2%.
The outlook for the rest of 2015 continues to look positive with Capita expecting full year dividends to reach £87.2bn – £600m more than previously forecast.
In addition, a dividend “spike” is predicted in the first quarter of 2016 ahead of tax reforms announced in the July Budget.
Research firm Markit forecasts that some UK companies will accelerate payments before the new rates take effect in April 2016.
Markit compared the behaviour of firms during a similar scenario in 2010 when the top rate of tax was increased. It found back then that 73 current FTSE All Share constituents brought forward their dividend payments.
Income seekers wishing to take advantage of the encouraging outlook for dividends may want to invest their money in UK equity income funds which aim to reward shareholders with regular dividend payments. With over 80 funds available in the space, picking the best solution can be difficult.
Here, we ask three professional fund buyers for their top picks:
Darius McDermott, managing director at FundCalibre
Liontrust Macro UK Equity Income
The fund has a well-defined process and a consistent record of identifying the right macroeconomic themes. The managers are not afraid to depart radically from their benchmark by investing in or avoiding, certain sectors, which has led to excellent long-term performance.
Five year return: 76.9% (v 62.6% for the FTSE All Share)
Threadneedle UK Equity Income
The managers avoid speculative stocks, which are currently fashionable and have short-term momentum. Instead, they look for unloved companies with the ability to sustainably grow their dividends. They have a ‘think active, act lazy’ philosophy. They aim to have conviction with all their investments and they are not afraid to ignore whole parts of the market.
Five year return – 94.25% (v 62.6% for the FTSE All Share)
Marlborough Multi-Cap Income
This fund ventures into the small-cap space where other income funds fear to tread. It aims to combine fast dividend growth with capital appreciation. The acclaimed stock-picking ability of the Hargreave Hale team has led to significant outperformance since the fund launched in July 2011.
No five year track record.
Three year performance: 86.3% (v 39.3% for the FTSE All Share)
Tim Cockerill, investment director at Rowan Dartington
JOHCM UK Equity Income
This fund offers an investment approach in which the managers Clive Beagles and James Lowen are prepared to hold stocks early which traditional equity income funds might shy away from. This is down, I feel, to a forward looking investment process which is continually seeking new ideas ahead of the peer group. Performance has been good long term and as the UK economy is now on a sound footing this fund should do well.
Five year return: 100.03% (v 62.6% for the FTSE All Share)
Carl Stick has been manager of this fund since 2000 making him one of the UK’s longest serving and most experienced equity income managers. The fund tends to have a higher weighting to FTSE 250 stocks than most which is a point of differentiation. However stock selection is always the critical element within a fund and Stick has been pretty consistent. Turnover is low and his focus tends to be on cash flow and the gradual growth of a business, compounding returns for investors long term.
Five year return: 99.25% (v 62.6% for the FTSE All Share)
Invesco Perpetual UK Strategic Income
Mark Barnett the manager is long term in his macro outlook and guides the fund based on this view. In a world in which growth is expected to be subdued he invests in companies where there is significant earnings visibility and where dividend growth is sustainable. This approach has been in place for many years and continues to prove successful, a result of this strategy is that portfolio turnover is low, which I believe is important in a world which has become very short term.
(On 30 June 2014, the fund moved from the UK Equity Income Sector into the UK All Companies Sector.)
Five year return: 109.96% for fund (v 62.6% for the FTSE All Share)
Jamie Fletcher, fund analyst at Sarasin & Partners
The fund is managed by Hugh Yarrow and Ben Peters at Wise Investments, which is based in Oxford, away from the ‘noise’ of the City.
The managers have strong influences from the Warren Buffett school of thought, believing in two margins of safety: one from valuation, one from high quality businesses.
When considering the widely used term of ‘quality’, they have a preference for firms with valuable intangible assets (such as strong brands or distribution networks) leading to wide economic moats. From a medium to short-term perspective, the preference for asset-light businesses lends confidence in the face of impending rate rises, avoiding the more interest rate sensitive industries such as utilities.
Put simply, we believe that in the long term, the managers’ focus on quality with a strict valuation discipline will continue to achieve the impressive performance we have seen since the launch of the fund.
Five year return: 99.81% (v 62.6% from the FTSE All Share)
Performance data correct to 21/7/15