OpinionMay 14 2014

UK Plcs save the day for income-hungry investors

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Income, lovely income. It is what most people crave from their savings and investments but it is something that has been in short supply since the financial crisis of 2008, base rate rooted down at 0.5 per cent, and quantitative easing took a grip of the economy.

Thank goodness, therefore, for the irrepressibility of dividend income. While savings income has been decimated by the Funding for Lending Scheme and the need for banks and building societies to rebuild their capital, UK Plcs continue to generate sufficient cash and profit to reward those that invest in them. Long live equity income.

The latest edition of the widely respected Dividend Monitor, issued late last month by Capita Asset Services, said it all. According to Capita, UK companies paid out a record £30.7bn of dividends in the first quarter of this year.

Although the figures were massively distorted by special dividend payments made by Vodafone – and to a lesser extent similar one-off payments made by Easyjet and Next – Capita said that divided growth this year was in line to exceed 5 per cent despite the debilitating effects of a strong pound. Encouragingly, it reported strong dividend payments among mid-cap stocks (constituents of the FTSE250) on the back of a continued recovery in the domestic economy. It also forecast a “bright outlook” for dividends next year.

With the FTSE100 index now yielding around 4.5 per cent and the FTSE250 2.5 per cent, it concluded that UK equities have “increased” their attractiveness as providers of income, compared to other asset classes. “Growth in income, and at a superior yield, is a very attractive combination for equity investors.” Absolutely.

In light of such an encouraging report on the state of UK dividends, it is no surprise that UK equity income funds continue to generate great interest from independent financial advisers and direct investors. Statistics from the Investment Management Association for March show that UK equity income funds attracted the highest level of net retail sales of all the equity sectors. Net retail sales totalled £259m. To put this number into perspective, global emerging market funds attracted net sales of just £10m.

And on the back of dividend growth and a strong UK stock market, it is no surprise that the investment returns from many UK equity income funds have been compelling with some
standout performances along the way.

Unicorn UK Income, for example, has registered a five-year total return of 225 per cent while Standard Life UK Equity Income has delivered 140 per cent. Other leading investment funds such as Artemis Income, JO Hambro Capital Management UK Equity Income, Invesco Perpetual UK Strategic Income, Schroder UK Alpha Income and Royal London UK Equity Income are not far behind.

Yet, I think the equity income story is at its most thrilling in the investment trust space. This is because of the ability of investment trusts – unlike their unit trust or investment fund counterparts - to build up income reserves. By squirrelling away income in the good times, they are then able to draw upon it in the more difficult times to smooth dividend payments to shareholders. The result is that many UK equity income oriented investment trusts have established a formidable record of dividend growth.

I think the equity income story is at its most thrilling in the investment trust space

According to the Association of Investment Companies, UK equity income trusts Temple Bar, Merchants, Murray Income, JPMorgan Claverhouse and City of London have all increased their annual dividends for at least each of the last 30 years. How reassuring for those investors reliant on the income to maintain their standard of living. For independent financial advisers, I would have thought it would make a compelling investment case to put before income-hungry clients.

Last week, I was drawn to some interesting investment trust research by Oriel Securities on the same equity income theme. It identified 16 high-yielding trusts for investors prepared to take equity risk – funds, primarily invested in listed equities, with a historic yield of at least 4 per cent.

The list was fascinating on many fronts. For a start, it included a number of investment trusts that also appear on the AIC’s roll call of investment companies with the longest records of consecutive annual dividend increases – Merchants (4.7 per cent yield and 32 years of dividend growth) and Scottish American (4.1 per cent and 34 years of dividend growth). Quite an achievement I would say – again something that astute investment advisers would be wise to pick up on.

The list also included a number of UK equity income trusts – the likes of Dunedin Income Growth (4 per cent), Merchants and Shires Income (4.7 per cent) – confirming the strength of the case for UK equity income investing.

Yet most intriguing of all was the presence of trusts where income generation is achieved beyond these shores. Among Oriel’s 16 high yielders were Henderson Far East Income (5.7 per cent), JPM Global Emerging Income (4.5 per cent), Schroder Oriental (4.3 per cent) and Aberdeen Asian Income (4.1 per cent).

Both Asian and emerging markets are not renowned for companies keen to keep shareholders sweet with growing dividends. But according to Michael Kerley, manager of Henderson Far East Income, things are changing. He said he is able to obtain dividend income from a far broader range of sectors than is the case in either Britain or Europe. And with Asian companies currently paying out a lower percentage of their profits to shareholders than elsewhere across the globe, the scope for further dividend growth is encouraging. With quantitative easing tapering off, he also believes the outlook for Asian and emerging markets will improve.

As I said at the beginning, thank goodness for dividend income. Of course, think UK equity income but do not forget the gathering investment case for global equity income. And do not discard the role that investment trusts can play in providing clients with the Holy Grail that is income growth.

Jeff Prestridge is personal finance editor of the Mail on Sunday