These may be rocky times for investors but UK equity income funds have proved a relatively reliable hunting ground for income seekers. There appears to be confidence this trend will continue despite some issues bubbling under in the past few months.
UK dividends hit a third quarter record, up a headline 6.8% to £27.2 billon, helped by the strong dollar, which boosted payouts in the period by £600 million, according to the latest Capita UK Dividend Monitor.
Despite the outlook becoming clouded by high-profile negative announcements from Glencore (a 56% fall in profits) and Standard Chartered (a 44% fall), the provisional forecast for 2016 is £89.8 billion, which is around 3% higher than the 2015 figure.
Justin Modray, founder of Candid Financial Advice, believes investment in large, multinational companies has helped many funds in this area to deliver strong returns over the past year.
‘In general terms and bearing in mind markets have been quite choppy and difficult, equity income funds have weathered the storm fairly well,’ he said.
The Insight Equity Income Booster fund, for example, boasts a strong yield of 9.02%, according to Citywire data for the year ending 31 October, 2015. It has exposure to a string of international giants, including Royal Dutch Shell, Astrazeneca, BP, Vodafone, Imperial Tobacco Group and GlaxoSmithKline.
Another strong income generator has been the Schroder Income Maximiser, which has a high percentage of its assets in large companies.
The Fidelity Enhanced Income fund looks for companies with consistent dividend growth and the strength to withstand tough economic times.
The PFS Chelverton UK Equity Income fund has a broader spread of exposures: 34.3% in stocks with market capitalisations above £1 billion, 20% in those of £100 million to £250 million, and 3.45% in smaller companies.
Finally, the Santander Enhanced Income portfolio, which is populated with large cap, has its highest sector exposure to financials (22.9%), followed by consumer goods (16.6%) and consumer services (14.7%).
Five-year total returns of funds generating the largest income in the sector
Funds ranked in terms of income earned, assuming £1,000 invested over five years.
Source: Lipper. Source of sector average: Citywire. Performance is based on total return in UK pounds calculated gross of tax, bid to bid, ignoring the effect of initial charges and with income reinvested at the ex-dividend date.