Just 15.78 per cent of IA UK Equity Income funds were forced to cut their dividend in 2015, according to the latest FE Trustnet study, as 64 out of a 76 portfolios in the peer group managed to better their 2014 income pay-outs last year. 
Concerns surrounding the outlook for the concentrated UK dividend-paying market have increased substantially over the past year – a time during which the demand for yield has only intensified as the population is ageing and interest rates have remained at their ultra-low levels.
Indeed, more than 10 FTSE 100 stocks have slashed their dividends since January 2014 (including Centrica, Rolls Royce, Rio Tinto and Standard Chartered) either as a result of challenges to their business model or poor operational performance.
Unfortunately, many expect that number to increase given pay-out ratios have only increased while dividend cover has fallen thanks to poor earnings growth.
Dividend cover on the FTSE 100
Source: Canaccord Genuity Quest
Though most of the fears have centred around the UK’s numerous commodity-related stocks such as the oil and mining companies, others – such as FE Alpha Manager Neil Woodford – have warned there will be cuts across the board in 2016.
“The market yield has been distorted by the fact that prices have fallen and dividends have not yet been cut, but they will and that is the next chapter in this rather difficult market environment,” Woodford said last month.
However, while last year was a poor one for funds in the IA Global Equity Income funds from a dividend perspective (FE Trustnet found that close to 60 per cent of them reduced their pay-outs last year), our most recent study shows that UK funds have largely shrugged off those concerns.
According to FE Analytics, just 12 out of the 76 funds in the highly-popular sector we have data for paid less to their unitholders last year than they did in 2014.
This means that 2015 was a bumper equity income funds as while just 15.78 per cent of them cut their income pay-outs in 2015, 21.05 per cent of the peer group reduced their dividends the year before.
As a result, our data shows that 45 per cent of the peer group with a long enough track record have increased their dividends in each of the last three calendar years (a feat only one fund in the IA Global Equity Income sector has achieved while 20 per cent have upped their income pay-outs in each of the last five calendar years.
These include the likes of Rathbone Income, Kames UK Equity Income, FP Miton Income and Evenlode Income – which have all increased their dividends in six consecutive calendar years.
The fund with the longest unbroken dividend track record is Trojan Income, which is headed by FE Alpha Manager Francis Brooke.
According to FE Analytics, Brooke has never cut his fund’s pay-out since its launch in September 2005 and, over the past 10 years, it has delivered dividend growth in pence per unit of 45.28 per cent.
Trojan Income’s dividend history over 10yrs in pence per unit
Source: FE Analytics
Though the fund has consistently increased its pay-out, its top quartile returns last year has meant its current yield of 3.8 per cent ranks it in the bottom quartile for the sector – which certain FE Trustnet readers have expressed concerns about.
Interestingly, though, many of the funds which now have the highest yields in the sector were those that cut their dividend last year.
These include the likes of Elite Charteris Premium Income (which yields 4.5 per cent) and UBS UK Equity Income (which yields 4.6 per cent), both of which were highly exposed to commodity related stocks for most of 2015.
Investors will have no doubt realised that 2015 was a good year for the ‘average’ active fund in the UK, given the FTSE All Share’s low return was largely caused by some of its largest constituents (such as mining and oil) posting hefty losses thanks to falling commodity prices and other macroeconomic headwinds.
Instead of holding those names, active managers could have simply taken an overweight position in the more domestically-focused FTSE 250 index – which made more than 10 per cent last year –relative to the wider market.
Nevertheless, the only passive vehicle in the sector, the £804m Vanguard FTSE UK Equity Income Index fund, was another that grew its dividend last year despite the challenges facing UK equities as a whole.
Not only has the tracker been one of the biggest income paying funds in the sector since its launch in June 2009, but FE data shows investors in the portfolio would have seen dividend increases in each of the last four calendar years.
Vanguard FTSE UK Equity Income Index’s dividend history in pence per unit
Source: FE Analytics
It seems that 2015 was a good year for the sector in more ways than one, though, as the ‘average’ member of the peer group paid-out more in total dividends last year than it did in 2014 as investors who put £10,000 into the fictional portfolio in January 2015 would have earned £430.65 by the end of the year.
Unsurprisingly, the five biggest income-payers were all those which used covered call options – a type of derivative that allows the manager to boost income pay-outs whilst putting a ceiling on potential capital gains.
In that respect, the best performer was Insight Equity Income Booster (£739.79), followed by Schroder Income Maximiser (£726.07), Premier Optimum Income (£712.20), Fidelity Enhanced Income (£644.62) and Santander Enhanced Income Portfolio (£641.84).
The highest paying traditional UK equity income portfolio last year, however, was FE Alpha Managers Jan Luthman and Stephen Bailey’s Liontrust Macro Equity Income fund with its distribution of £533.16 on £10,000.
Highest paying traditional UK equity income funds in 2015
Source: FE Analytics *Figures based on a £10,000 investment in January 2015
While the fund has grown its dividend in each of the last three years and comfortably beat the FTSE All Share last year from a total return point of view, its gains of 4.76 per cent ranked Liontrust Macro Equity Income in the sector’s third quartile in 2015 in that respect.
Looking further down the list of the top 10 income-payers in the sector last year, and it seems that investors were rewarded for focusing their attention outside of the FTSE 100.
For example, the likes of PFS Chelverton UK Equity Income, Ardevora UK Income and Marlborough Multi Cap Income (which primarily invest in mid and small-caps) all feature. Given investors can find better levels of dividend cover further down the market-cap spectrum, many would expect those sorts of funds to be among the highest dividend payers by the end of 2016.
