Earlier this year, the FE Research team pointed out that yield is often the only income information found on a fact sheet and so becomes on the main area of an investor’s focus when they are weighing up the merits of different funds.
However, FE Research head Rob Gleeson (pictured) argued that yield is not the only thing an income investor should focus on - indeed, it is not even the most important consideration.
“What income investors really care about is the money that is being paid every month or quarter, and this doesn’t have a direct relationship to yield. A fund’s yield could go down and the dividend pay-out could actually increase,” he said.“Many investors look at the yield first, but it’s the last thing we look it. It’s a safety net.”
Given Gleeson’s belief that a manager’s “commitment to the dividend” is the all-important factor in an income fund’s ultimate worth, FE Trustnet has examined which funds in the IMA UK Equity Income sector have managed to grow their dividend by the most over the seven years of the past market cycle.
Over the coming weeks, we’re going to taking a deeper look at the sector to see which funds are and aren’t meeting client expectations.
But we wanted to start the campaign on a positive note by looking at some examples of funds that are committed to paying out more to their investors.
As a starting point, we have looked at all the members of the sector that have a full track record spanning 1 January 2007 to 31 December 2013 and worked out how much income would have been paid in each calendar year on an initial investment of £1,000.
Our research shows Charles Montanaro's £70m Montanaro Equity Income fund has grown its dividend by the most between the start of 2007 and the end of 2013 - with it rising 287.8 per cent over the seven years in question.
Elite Charteris Premium Income comes in second place with dividend growth of 117.6 per cent.
However, it must be noted that these two funds have achieved such rapid growth because of the relatively low starting point of their dividends.
The Montanaro fund paid out just under £11 per £1,000 in 2007 and grew it to around £41.50 in 2013 while Elite Charteris Premium Income’s went from £19.60 to £42.69, meaning the total income paid over this time is less than the sector’s average.
As a point of comparison, we’ll be putting the funds’ income earned against Scottish Mutual UK All Share Index, which is the tracker that paid out the most income over the seven years examined.
Income earned by funds on £1,000 between 2007 and 2014
Source: FE Analytics
The next fund on the list - BlackRock UK Income - paid a higher overall dividend than the above funds and managed to grow it by 93.68 per cent over the seven years, with a move from £36 to about £69on an £1,000 investment.
It has the aim “to provide an above-average and growing income”.
BlackRock UK Income, which is managed by Adam Avigdori, was ranked 62 out of 252 funds in FE Research’s September 2014 income study, putting it in the first quartile of all the portfolios examined.
The fund received a total score of 199 out of 300 in the study, with 71 points being awarded for its yield, 59 for dividend stability and 69 for downside protection.
From a total return point of view the fund has outperformed the FTSE All Share and the average IMA UK Equity Income fund over the past seven years by 39.96 per cent. However, it has underperformed both the index and the peer group over three and five years.
BlackRock UK Income has a clean ongoing charges (OCF) of 0.92 per cent and a yield of 3.60 per cent.
The £158.3m Aberdeen UK Equity Income fund increased its dividend by 88.39 per cent over the last seven full calendar years, lifting it from just below £29 per £1,000 to more than £54.50.
Interestingly, it does not make growing its dividend a key stated target, instead saying its aim “to achieve an attractive level of income combined with capital growth”.
It also scored highly in FE Research’s income study, coming in 15th place with a score of 258 out of 300. It took 92 points for its yield, 88 for dividend stability and 78 for downside protection.
Again, the fund’s return from a total return perspective is mixed. It was first quartile in both 2010 and 2011, before slipping into the third quartile in 2012 and the fourth in 2013.
This means it is second quartile over five years but third over one and three years.
Aberdeen UK Equity Income, which holds three FE Crowns and is managed by Aberdeen’s pan-European equity team, has a clean OCF of 0.86 per cent and yields 3.90 per cent.
Troy Asset Management’s Trojan Income fund is ranked third on our list of dividend growers, after its pay-out moved from just over £40 per £1,000 invested to around £69. This is growth of 68.91 per cent.
Income earned by funds on £1,000 between 2007 and 2014
Source: FE Analytics
The fund came first in FE Research’s income study, scoring 291 out of a possible 300.
It scooped a maximum 100 points for its downside protection, 96 for yield and 95 for dividend stability.
It is currently first quartile over one and five years but is in the third quartile over three years following underperformance against its peers in 2012 and 2013.
Trojan Income, which is managed by FE Alpha Manager Francis Brooke, holds five FE Crowns and appears on the FE Research Select 100 list of recommended funds.
The FE Research team says: “Brooke brings stability to the fund by investing in companies that have healthy financial statements and can generate strong cashflows despite challenging economic conditions. The portfolio has not changed much since launch, consistent with the manager’s long-term approach.”
Trojan Income has an OCF of 1 per cent and yields 3.93 per cent.
Other funds that appear in the top quartile of our dividend growth research include Robin Geffen’s Neptune Quarterly Income, Clive Beagles and James Lowen’s JOHCM UK Equity Income, David Horner and David Taylor's PFS Chelverton UK Equity Income and Kevin Murphy and Nick Kirrage’s Schroder Income.
Of course, dividend growth alone is not the only consideration for income investors.
We wanted to start this series on a positive note but in future articles in this series we’ll be looking at issues such as which funds have failed to keep pace with inflation and which are now paying lower dividends than they did in 2007.
