Equity Income  

Why UK equity income remains a popular asset class

This article is part of
Guide to global equity income

Why UK equity income remains a popular asset class

UK investors have long been drawn to UK equity income funds for their equity income exposure over and above other regions.

This home country bias has been backed up by some impressive dividend growth figures over the years, as well as several high profile UK equity income managers achieving stellar returns for investors, among them Neil Woodford, founder of Woodford Investment Management.

Figures from the Investment Association show net retail sales of UK equity income funds are fairly consistent.

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The sector clocked up positive net retail sales in nine out of 12 months in 2016, as investors stuck with UK equity income funds.

The IA UK Equity Income sector was knocked off course in June last year, around the time of the referendum on EU membership as investors became jittery, prompting net retail outflows of £312m.

First port of call

“The UK equity income sector is the first port of call for investors,” says Adrian Lowcock, investment director at Architas. 

“The UK market has always had a preference for paying dividends and there is no currency risk for investors to be concerned about.

“Even for those not looking for income, dividends make such a difference. Dividends reinvested are a big driver of returns and given that the FTSE 100 [index] hasn’t risen much since 1999 they have been the main driver of returns for investors.”

Hugh Yarrow, manager of the Evenlode Income fund, agrees: “There’s a strong dividend culture in Britain, and many UK-domiciled companies have produced strong, consistent real dividend growth over time. 

“These growing, sterling-denominated income streams can form a helpful bedrock for the UK-based income investor for whom liabilities also arise predominately in sterling.”

Another reason for the popularity of UK equity income is the ongoing search for yield, particularly while interest rates are at rock bottom.

Investment trusts

The investment trust structure has proven to be a vehicle well suited to equity income funds as trusts can hold back some of the income they receive each year for leaner times.

“Known as ‘dividend smoothing’, this is a feature that has helped the investment company sector build up an enviable dividend track record, through the good times and the bad, and the UK equity income sector is a case in point,” acknowledges Annabel Brodie-Smith, communications director at the Association of Investment Companies (AIC).

Data from the AIC using Morningstar reveals £100,000 invested into the average UK equity income investment trust on 31 December 1996 would have generated an initial annual income of £3,700 by 31 December 1997, which would have turned into an annual income of £8,516 in the year to 31 December 2016.

Annual dividend growth was 4.5 per cent over this period, meaning over 20 years investors would have received £119,872 of income from this portfolio.

Figure 1: £100,000 invested in average UK Equity Income IT sector at 31 December 1996