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Four unusual income opportunities for unusual times

Canada Life head of UK equities Craig Rippe highlights some of the more esoteric areas of the FTSE that are proving to be good sources of income.

Unusual times 

 

'It has been a tricky environment for UK equity income investors in 2017 so far, as a number of stock and sector-specific issues have impacted individual fund managers and indeed the sector as a whole,' writes Canada Life's UK equity head Craig Rippe (pictured). 

For example, widely-held companies such as AstraZeneca and Provident Financial suffered significant share price falls, whilst the shock announcement from the US Food & Drug administration on future tobacco regulation had a big impact on the sector, a traditional darling of the income space.

While the CF Canlife Equity Income fund maintains exposure to some of these income stalwarts, its management team believes diversifying sources of income is key. 

Rippe describes these investments as 'unusual dividends' and he highlights four examples held with the fund. 

 

 

Unusual times 

 

'It has been a tricky environment for UK equity income investors in 2017 so far, as a number of stock and sector-specific issues have impacted individual fund managers and indeed the sector as a whole,' writes Canada Life's UK equity head Craig Rippe (pictured). 

For example, widely-held companies such as AstraZeneca and Provident Financial suffered significant share price falls, whilst the shock announcement from the US Food & Drug administration on future tobacco regulation had a big impact on the sector, a traditional darling of the income space.

While the CF Canlife Equity Income fund maintains exposure to some of these income stalwarts, its management team believes diversifying sources of income is key. 

Rippe describes these investments as 'unusual dividends' and he highlights four examples held with the fund. 

 

 

Financials – Lancashire Group

 

'Lancashire provides global specialty insurance and operates in Bermuda, London and within the Lloyd's market. The stock was recently impacted by the three hurricanes that hit the US and Caribbean as well as the Mexican earthquakes. However, the share price has since rallied strongly as losses have not been as bad as originally forecast.

'We believe Lancashire’s combination of a strong balance sheet and market-leading underwriting leaves it well placed to increase market share going forward, given the impact of natural disasters on the wider insurance market.

'Management have a hugely pragmatic dividend policy – paying out when premiums are cheap and retaining earnings when premiums are rich. This has resulted in a volatile but generally rewarding yield.

'Despite this attractive story, however, the stock is held by just 22% of our peers in the IA UK Equity Income sector.' 

Growth – Britvic

'Well known to many as the makers of Robinsons Squash, J2O and Tango, Britvic also distribute global brands such as Pepsi and 7UP in the UK.

'The company has been a strong performer in the last few years, but we believe it still offers upside, driven by its international expansion programme and management actions. Currently yielding 3.3%, the stock is held by just 15 funds in our peer group.' 

Cyclicals – BBA Aviation

'Following merger and acquisition activity last year, BBA Aviation is a high market-share provider of aviation support and aftermarket services to business and private jets, primarily in North America.

'It has delivered a 20% return over the last 12 months and is a significant beneficiary of dollar strength, with over 80% of revenues emanating from North America.

'With a yield of 3.3%, we continue to believe that management have the ability to grow underlying profit growth ahead of the market, whilst the dividend remains well-covered. BBA is owned by funds representing just 23% of the IA UK Equity Income sector.' 

Defensives – BAE Systems

 

'This is the "most common" of our unusual dividends, with BAE Systems being held by 48% of our peers. However, the CF Canlife UK Equity Income Fund is approximately 1% overweight the peer group in the stock and we believe the outlook for the defence sector in general is positive going forward, which is supportive of companies such as BAE.

'This is due to the heightened geopolitical risk that we are witnessing globally, such as North Korea’s propaganda war, a fractious US President and increasing evidence of Russian meddling in global politics. With a yield of 3.6%, we believe the company will continue to generate excess cashflow for shareholders over the medium term, secured by long-term order book revenues.' 

Over the last three years, the CF Canlife UK Equity Income Fund has returned 29%, beating the peer group average of 26% 

According to figures provided by the group, the fund has also paid £1,506 in income during this period, based on an initial investment of £10,000.

'Going forward, we believe the fund can continue to deliver an attractive total return for investors as well as diversifying these sources of return,' Rippe said. 

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