Equity income: home is where the heart is?

‘Currency exposure for dividends from global equity income funds are likely to be more diverse, with possibly more emerging market currency exposure. This may make future dividend distribution patterns less predictable or protectable.’

Frikkee also lauds the sophistication of the UK, which puts it at a premium to the global market. ‘The dividend yield on UK equity income funds is likely to be higher than on global equity income funds because the FTSE All Share dividend yield [currently 3.6%] is higher than the FTSE World dividend yield [3.1%],’ she says.

‘The UK has the longest dividend culture of most major equity markets, which may well offer greater dividend stability going forward.’

Citywire AA-rated Richard Colwell, co-manager of the £1.4 billion Threadneedle UK Equity Income fund, agrees with this.

‘Although we forecast UK earnings growth to be negative for 2012, we expect this to turn positive again in 2013. UK dividends are currently well covered at 2.3 times and we expect them to grow by up to 7.5% over the coming year (assuming a repeat of the Vodafone special dividend),’ Colwell says.

‘While heightened uncertainty over corporate growth prospects persists and companies are likely to be conservative when setting dividend policy, balance sheets remain strong, with high levels of cash and dividend cover levels that are still well above long-term averages.’

Piers Hillier, manager of the Kames Global Income fund, still considers the UK a core market despite the plethora of opportunities available to him.

‘After the US, the UK has the most companies, approximately 50, that have consecutively grown the dividend over the last 10 years,’ he says. ‘With that kind of persistency these stocks offer an attractive alternative to lower-yielding assets for investors with income needs.

‘Looking at the FTSE 100, less than 30% of revenues come from the UK, making it one of the most globally diverse primary stock markets in the world. This, combined with the discount to global equity markets, offers an attractive risk reward trade-off for those looking for global exposure at a reasonable price.’

This is why Bestinvest senior research analyst Ben Seager-Scott remains interested in the UK. ‘The UK stock market is not the same as the UK economy,’ he says. ‘Many UK companies operate globally and a significant portfolio of revenues for FTSE 100 companies come from overseas.