It is possible to build a monthly UK equity income portfolio yielding more than 4 per cent and with a five-year track record of dividend increases using just three IA UK Equity Income funds: Insight Equity Income, Kames UK Equity Income and LF Miton UK Multi Cap Income.
There are 13 funds in the IA UK Equity Income sector that meet the above criteria and pay a quarterly dividend, but just eight of these also beat the FTSE All Share over the five-year period in question.
The only one of these funds that pays its dividend in March, June, September and December is Kames UK Equity Income, making it an automatic choice.
Three funds pay out in February, May, August and November: Insight Equity Income, Quilter Investors UK Equity Large-Cap Value and NFU Mutual UK Equity Income. The Insight fund was chosen as it has the highest FE Crown Rating, at three.
Four funds pay out in January, April, July and October. Here it is difficult to look past LF Miton UK Multi Cap Income: the fund is the second-best performer in the sector since its launch in October 2011, and its focus further down the market capitalisation scale means it helps to add diversification to investors’ income.
Below we take a closer look at each fund.
Insight Equity Income’s manager Tim Rees aims to find stocks that offer the potential for long-term dividend increases. He said that amid the current uncertainty created by Brexit, the majority of stocks that meet this criteria are large-caps with internationally diversified earnings.
“We remain positive regarding the depth, diversity and largely international nature of the companies that represent the UK equity market, especially with regard to the companies that constitute the fund’s portfolio,” the manager said in his most recent note to investors.
There is not much surprise among the fund’s top-five holdings: Royal Dutch Shell, BP, Rio Tinto, HSBC and AstraZeneca. However, Rees recently reduced his position in Rio Tinto on concerns about a slowdown in China and a trade war with the US. He also cut his exposure to HSBC.
Insight Equity Income has made 225.82 per cent since Rees joined in January 2004, compared with gains of 219.57 per cent from the FTSE All Share and 202.94 per cent from the sector.
Performance of fund vs sector and index under manager tenure
Source: FE Analytics
It is yielding 4.59 per cent. Someone who invested £10,000 into the fund at the start of 2014 would have received £2,384.1 in income alone over the next five years.
The fund is £180m in size and has ongoing charges of 0.82 per cent.
LF Miton UK Multi Cap Income is headed up by small cap veteran Gervais Williams alongside Martin Turner and, as a result, the fund focuses further down the market cap spectrum than most of its peers: it has 32.2 per cent of its assets in FTSE AIM companies and another 25 per cent in FTSE SmallCap and FTSE 250 stocks
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Williams (pictured) and Turner aim to identify companies that can grow revenues and maintain profit margins. Meeting company management teams is part of their process, however they are more interested in understanding business models.
While LF Miton UK Multi Cap Income is a top-quartile performer over the past five years, it has fallen into the bottom quartile over one and three years. Williams said that the increase in global liquidity since the start of the year has disproportionately helped larger caps over AIM stocks, which helps to explain his recent underperformance.
However, he remains confident in his process, saying: “Over the longer term we believe that investing for good and growing dividend income across the full opportunity set of market capitalisations has scope not only to optimise ultimate dividend growth, but also deliver premium returns.”
LF Miton UK Multi Cap Income has made 159.79 per cent launch, compared with 93.42 per cent from its sector and 90.82 per cent from the FTSE All Share.
Performance of fund vs sector and index since launch
Source: FE Analytics
It is yielding 4.39 per cent. Someone who invested £10,000 into the fund at the start of 2014 would have received £2,357.44 in income alone over the next five years.
LF Miton UK Multi Cap Income is £1.3bn in size and has ongoing charges of 0.81 per cent.
Kames UK Equity Income targets a growing dividend with a yield at least 10 per cent higher than the FTSE All Share. It has a concentrated portfolio of higher and lower yielding stocks, with managers Douglas Scott and Iain Wells recognising that there is often a trade-off between dividend yield and dividend growth.
The fund invests across the market cap spectrum, although 73.5 per cent of its assets are invested in large-cap stocks, with another 20 per cent in mid caps.
Wells said he is currently finding opportunities in insurers, adding that life insurers – in particular – offer high and growing dividends supported by underlying demand.
The managers have also raised exposure to more domestically focused names, saying Brexit fears have created value.
“This has included adding to the likes of Greggs, Taylor Wimpey and Lloyds Bank,” Wells continued. “Most recently, evidence of a stabilisation in China has seen us add to our mining exposure.”
Kames UK Equity Income has made 166.19 per cent since launch in June 2009 compared with gains of 167.18 per cent from the FTSE All Share and 161.43 per cent from its sector.
Performance of fund vs sector and index since launch
Source: FE Analytics
It is yielding 4.8 per cent. Someone who invested £10,000 into the fund at the start of 2014 would have received £2,311.24 in income alone over the next five years.
The £51m fund has ongoing charges of 0.69 per cent.
There is one fund that meets all the criteria mentioned above and that pays a monthly dividend: AXA Framlington Monthly Income. It combines traditional high-yielding equities, lower-yielding growth stocks and some bond exposure to target a yield of 125 per cent of the FTSE All Share’s.
The team at Tilney Bestinvest said that while manager George Luckraft has a successful long-term record, “his bias to small- and mid-cap stocks can lead to periods of significant divergence from the benchmark”.
AXA Framlington Monthly Income has made 208.64 per cent since Luckraft joined in September 2002, compared with 274.22 per cent from the FTSE All Share and 250.81 per cent from its sector.
It is yielding 4.52 per cent. Someone who invested £10,000 into the fund at the start of 2014 would have received £2,418.65 in income alone over the next five years.
The £390.1m fund has ongoing charges of 0.84 per cent.
In a previous article, FE Trustnet looked at three investment trusts that could be used to build a monthly income portfolio.