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Equity income: home is where the heart is?

by Dylan Lobo on Dec 27, 2012 at 07:00

Equity income: home is where the heart is?

In September, US giants McDonald’s and Microsoft increased their dividend payments by 15% and 10% respectively.

At the same time, part state-owned UK bank Lloyds was locked in talks with the Financial Services Authority seeking permission to resume its dividend. The payment has been withheld since the height of the credit crunch in 2008, when regulators turned stringent and ordered stricken lenders to bolster their capital positions.

Banks used to be a staple of UK equity income funds before the financial crisis swept away this source and subsequently exposed there was a lack of diversity in the domestic market.

This was exacerbated by the crisis at BP, another income bellwether, forced to suspend its dividend in the summer of 2010 following the Deepwater Horizon spill.

Throw in fears about increased regulation in the banking and utilities sectors and it is hard to make a case for the once-dependable UK equity income market, especially in the face of some maturing global competition.

Too few names

Thurleigh chief investment officer Charles MacKinnon (pictured) outlines the issue: ‘The problem we are facing today is that there are many fewer high-dividend paying UK-based equities and this means there is too much concentration on a few names,’ he says.

‘This was shown very clearly when the disaster in the Gulf of Mexico forced BP to cut its dividend, which constituted a significant percentage of the dividend flow from the FTSE.’

According to MacKinnon, global funds, in contrast, have a much broader base of high-quality companies from which to pick. ‘They have not received the distribution and attention they merit, mostly as people are overly scared about the currency exposure,’ he adds.

‘Also, they are not always run by high street names and so intermediaries are less familiar. The real advantage of owning a global income fund is that you have a broader currency base and are less exposed to idiosyncratic risk of one company having a problem.’

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