Dennehy (pictured) says these "income aristocrats" have a consistent record in raising their dividend and are also likely to increase their payout in the future, given their positioning in relation to the macro outlook. The Artemis and BlackRock funds have both raised their dividend payout for nine years in a row, with the Standard Life fund just behind on eight.
Invesco Perpetual High Income and Premier Monthly Income have also increased their dividend payout eight years in a row, but Dennehy is not as convinced they will be able to do so in the future.
“Income aristocrats”
| Fund | Payout growth consistency (yrs) | Current yield (%) | 10yr payout growth (%) | 10yr total return (%) |
|---|---|---|---|---|
| Artemis Income | 9 | 4.3 | 103.41 | 207 |
| BlackRock UK Income | 9 | 3.76 | 61.69 | 150.21 |
| Invesco Perpetual High Income | 9 | 3.62 | 243.15 | 248.73 |
| Premier Monthly Income | 8 | 5.87 | 60.66 | 148.04 |
| Standard Life UK Equity High Income | 8 | 4.17 | 75.5 | 181.97 |
Sources: FundExpert and FE Analytics
Over the 10-year period, it is difficult to separate Artemis Income and Invesco Perpetual High Income, headed up by FE Alpha Managers Adrian Frost and Neil Woodford, respectively.
Frost’s portfolio has grown its dividend payout over a greater number of years and currently offers a higher yield, but Woodford comes out on top for overall dividend growth and total returns over 10 years.
However, Dennehy believes that Woodford’s reliance on defensive sectors could hamper the fund’s ability to grow its dividend in the future.
"Invesco Perpetual High Income’s focus on defensives – such as pharmaceuticals – will likely hinder the income growth prospects of the fund," he said.
"Also, the 10-year payout growth figure flatters as it is based on a low starting yield of 2.2 per cent, following a large payout cut in 2002."
"However, from a total return perspective, the fund remains hugely impressive," Dennehy added.
Performance of funds vs index over 10yrs
Source: FE Analytics
He is more optimistic about BlackRock UK Income and Standard Life UK Equity High Income.
"BlackRock UK Income remarkably managed to maintain its payout even through 2008," he said.
"In the only year that the fund failed to grow its payout [in the last decade], it still avoided a cut."
"The fund’s yield gives scope for further payout growth, although the exposure to Vodafone, which pulled a special dividend last year, and Imperial Tobacco, which could see its dividend cut this year, might be a drag."
"Standard Life UK Equity High Income has grown its payout in the last two years by 18.87 per cent [in 2012] and 7.96 per cent [in 2011]. The fund has its greatest exposure to financials and has an attractive current yield of 4.17 per cent."
He says Premier Monthly Income’s use of derivatives to boost its yield, coupled with its very high payout at present, means that its dividend payout could come under pressure in the near future.
Dennehy believes that income remains under-utilised by the majority of investors – especially given that interest rates are at historic lows.
"Dividend income is far more reliable than deposit income and gives you a fighting chance of keeping up with inflation," he said. "The lack of volatility on dividend income is too often overwhelmed by a fear of capital volatility."
"A reliable, growing income will be crucial through a long retirement, especially one where aging demographics – as well as too much debt – will result in the Government and companies reneging on pension promises made yesteryear."
"The level of income growth is vitally important. Assume a 60 year old invests £20,000 into each of two income funds, both yielding 5 per cent, with a starting income of £1,000."
"If 'fund X' increases payouts by 5 per cent per annum and 'fund Y' increases payouts by 10 per cent per annum, 'fund X' would have grown by £2,080 by the time that person reaches 75 years old, while 'fund y' would have grown by £4,180 – twice as much.”
"Investors must make their own plans and take advantage of the best equity income funds – those that prioritise not just income, but a growing income with a focus on the lack of volatility and relative predictability of the income."