Talking Point  

UK equity income investors over reliant on three stocks

UK equity income investors over reliant on three stocks

A tiny number of stocks are top ten positions in a majority of the 84 UK Equity Income funds currently available to advisers in the UK, data from Octopus shows.

Of the 84 funds in the IA UK Equity Income sector, pharmaceutical company GSK was held as a top ten position in 64 of them, which equates to 76 per cent, according to the data, which was sourced from Lipper and from fund factsheets, dated January 22. 

Oil giant Royal Dutch Shell is held in 55 of the funds, equating to 65 per cent of the total, and BP is held in 51 of the funds, equating to 61 per cent of the funds.

Of those three stocks, only GSK’s dividend is more than 1.5 times covered by the cash it generates from day-to-day activities. 

That means, at present, that GSK earns 150 per cent of the cash amount it pays out in dividends every year, which is the minimum level analysts regard as acceptable to consider a dividend to be safe.

The cash generated by Royal Dutch Shell is 130 per cent of the dividend it pays out, while BP generates 147 per cent of the cash it pays out in dividends.

Chris McVey, a fund manager at Octopus said: “People often make an entirely reasonable assumption that you can achieve diversification by investing in different income funds from different managers.

"Yet in reality you’re getting a very similar product, just in a different firm’s packaging.

"This makes it much more difficult for investors to build a balanced income portfolio and means they might want to look more closely at the underlying holdings.”

The data also revealed that the ten UK equities which are held in most Equity Income funds have an average level of dividend growth of 3.65 per cent a year.

Will McIntosh-White, multi-asset fund manager at Rathbones, said: "It is a feature of the UK market that the ten largest stocks in the FTSE 100 give 54 per cent of all of the income.

"Now the ten largest stocks include banks, mining, and oil companies, all businesses that are very cyclical, and where we could see dividend cuts.

"One of the advantages we have as direct equity investors is that we can buy shares we want, fund-of-funds would find it very hard to get exposure to the UK without having to buy a lot of income funds that have the same stocks in them and so are not diversified."