Maintaining a portfolio of companies that can sustainably grow their dividend is the key to running a successful equity income portfolio, according to star manager Francis Brooke.

Brooke, who heads up the sector-leading Trojan Income fund, says he targets reliable franchises with predictable top-line growth, strong balance sheets and defensive characteristics.

He points to consumer goods companies and non-bank financials such as Amlin as particularly attractive.


The manager believes a yield of between 4 and 5 per cent is the perfect level to maintain a competitive level of capital growth.

"If you want a good total return, you shouldn’t have a yield much higher than the All Share index," he said.

"I think a yield of 4.3 per cent is a reasonable premium to the market yield, which is 3.5 per cent or so. If you go much higher than that, you run the risk of converting capital into income, which isn’t healthy for long-term returns."

A recent FE Trustnet article highlighted that the highest-yielding funds in the UK Equity Income sector tend to underperform their benchmarks in the short-, medium- and long-term.

Performance of fund vs sector and index over 5-yrs



Source: FE Analytics

Brooke’s emphasis on sustainable dividend growth has worked well for his £428m Trojan Income portfolio, which is the best performing and least volatile fund in its UK Equity Income sector over a five-year period.

"Our aim is to preserve real value of capital by delivering consistent absolute returns with below-average volatility," he explained. "We’re happy to say this is something we’ve achieved since launch."