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What to buy if you want a growing source of income from UK equities

13 April 2015

While there are plenty of risks to worry about, JPM’s William Meadon says the UK is still one of the best markets to find a growing source of income and highlights the areas he believes offer premium yields and the best future dividends.

By Alex Paget,

Senior Reporter, FE Trustnet

The large majority of macroeconomic fears are now priced into the UK market, according to JPM’s William Meadon, who says not only is it attractive from a valuation point of view, but is also a good hunting ground for investors seeking a growing source of income.

So far, 2015 has been a very good time to be invested in the UK equity market as the FTSE All Share is up close to 10 per cent year to date while the FTSE 100 has already broken through its historic high of 6,930 and even surpassed the psychological 7,000 barrier over recent months.

Performance of index in 2015

 

Source: FE Analytics 

Nevertheless, there have been a number of industry experts who have warned against buying into the UK market due to the threat of deflation and the upcoming general election, which is expected to create a high degree of political uncertainty.

These include the likes of Neptune’s Robin Geffen and Henderson’s Bill McQuaker as well as FE Alpha Manager Luke Newman, who recently said that he may go net short the FTSE within his five crown-rated Henderson UK Absolute Return fund.

However while he isn’t getting too carried away given the political uncertainty, Meadon – manager of the five crown-rated JP Morgan Claverhouse Investment Trust – says that UK equities remain very attractive.

“There are still no end of things to worry about – the Greek euro crisis, currency wars and fears of spreading global deflation, just to name three. But we continue to believe that most of these fears are discounted,” Meadon said.  

“The rapid rise in European stocks in the first two months of this year shows how dramatic the effect of a sentiment change can be on equities when bears moderate their pessimism.”

“The fall in the oil price is acting in practice as the quantitative easing that the authorities always intended, in that it gets real cash into consumers’ pockets (rather than merely inflating asset prices). The average American will be $1,000 better off this year than last if oil stays at this level.”

He added: “Replicated across the world this will give a material fillip to both world growth and consumer confidence.” 

As a result Meadon remains bullish on the internationally exposed FTSE 100, which has more than 70 per cent of revenues coming from a well-diversified collection of international operations.

However, apart from the macroeconomic issues for why UK equities still look attractive, Meadon says there is a more technical reason to be bullish on the domestic market.

“The search for a good, secure income remains one of the biggest themes for investors globally – on that basis FTSE 100 equities yielding prospectively 4 per cent looks pretty good value. UK corporate balance sheets remain as strong as ever and shareholder-friendly managements are still prepared to give excess cash back to owners through dividends,” he said.


Meadon joined Sarah Emly as co-manager of the JP Morgan Claverhouse Investment Trust in February 2012 over which time it has beaten the FTSE All Share by close to 25 percentage points, according to FE Analytics.

Performance of trust versus sector and index since Feb 2012

 

Source: FE Analytics 

On top of that short-term outperformance, the closed-ended fund is renowned for its long-term dividend growth as data from the AIC shows it has increased its payout in each of the last 42 years.

To put this into context, the trust’s 2002 dividend worked out at 9.66p per share and has steadily risen to 20p in 2014.

In order to maintain that growing source of income, the manager says he and Emly are focusing on certain UK market sectors and stocks that offer good dividend growth prospects and/or premium dividend yields – starting with life insurers.

“Some of the major UK life insurers are premium dividend yielders, like Legal & General, whilst others offer strong dividend growth records such as Prudential,” Meadon said.

“Aviva’s proposed takeover of Friends Life will accelerate and enhance Aviva’s own dividend growth prospects. Aviva shareholders have just enjoyed a 30 per cent increase in their final dividend for FY 2014.”

Meadon also likes non-life insurers such as Direct Line Insurance, which offers a premium dividend yield and has delivered good dividend growth over recent periods, as well companies within the financial services sector like Jupiter Asset Management which offer strong dividend growth prospects.

However, one area the manager is particularly excited about is domestic facing companies.

“Some of the more consumer oriented stocks also delivered good dividend growth last year as a result of managements’ persistent focus on cash generation,” Meadon said.


“Examples include the clothing retailer, Next, which delivered dividend growth of over 20 per cent last year as well as three special dividends during 2014, and the television broadcaster ITV, whose board has committed to at least 20 per cent annual growth in the ordinary dividend over the next three years.”

“We also continue to view the prospects for the recently merged Dixons Carphone very positively.”

While 2013 was a relatively flat year for UK equities and especially for those with high exposure to the UK consumer, Next, ITV and Dixons Carphone all outperformed the wider market partly as a result of their income potential.

Performance of stocks versus index in 2013

 

Source: FE Analytics 

Meadon expects those companies to continue to outperform the index in the future and holds them within his portfolio.

JP Morgan Claverhouse is currently trading on a 7.46 per cent discount to NAV, which is wider than its one and three-year average discounts. Its shares also traded on a premium at points over the past 12 months.

The trust has a yield of 3.3 per cent, gearing of 18 per cent and ongoing charges of 0.68 per cent. That doesn’t include its performance fee, however.

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.