The UK funds paying the most in dividends over five years

Investors in Schroder Income Maximiser could have received £5,111 in income over the past five years, the highest payout in the IA UK Equity Income peer group, if they committed a starting sum of £10,000 at the end of 2020, data from FE Analytics shows.

The £883m portfolio is split into two parts: a traditional income fund and a covered-call strategy. The former is managed by the global value team, while the latter is run by the structured fund management team.

Stock selection is implemented by the value team in the same way as the broader Schroder Income fund, which also appears on the list below.

This typically produces a yield of around 4%, with the structured team then selling call options on stocks owned, which is a contract to buy stocks back in the future at a set price. The fund receives upfront cash payments for doing this, which is then added to the dividend paid out.

Schroders dominated the list of highest payers, with the £105m Schroder UK-Listed Equity Income Maximiser in second place, paying out £4,595.80 over five years.

Managed by the risk and structured team, it aims to replicate the performance of the FTSE 100 by owning a carefully selected and representative basket of securities that will closely mirror the full index’s performance.

Both funds aim to achieve 7% yields per year and, in 2025 alone, paid out more than £1,000 each in dividends based on an initial £10,000 invested at the end of 2020.

Schroder UK-Listed Equity Income Maximiser is recommended by analysts at FE Investments, who said: “Relative to similar strategies, we have a preference for this fund due to its simplicity and cost. The derivatives strategy is only employed on top of a passive strategy, while many of its peers use it on top of an active fund, which can significantly underperform the index.

“Investors with a high income target and who have less regard for capital return are best suited for this fund.”

In third place, Premier Miton Optimum Income also aims to provide an income of around 7% through the use of derivatives to supplement the dividends paid from the underlying holdings, while fourth-placed Fidelity Enhanced Income looks to achieve an income that is 50% higher than that of the FTSE All Share.

While these funds have produced strong returns, they may have had to give up some capital gains due to their covered-call strategies.

Source: FE Analytics

The top dividend-paying fund that uses more traditional methods is the passive Vanguard FTSE UK Equity Income Index, which tracks a benchmark that buys companies based on their expected ability to pay higher-than-average dividends.

Analysts at Titan Square Mile recommended it for a number of reasons: the suitability of the benchmark it tracks, Vanguard’s “commitment to operating passive strategies”, the size of the fund, the cost and its “good historical record of tracking its benchmark”.

“Overall, we believe that the index should provide a higher yield than the FTSE All Share, while providing investors with broad UK equity exposure,” they said.

The top-paying active UK equity income fund that does not use derivatives is the £2.3bn Man Income fund run by FE fundinfo Alpha Managers Henry Dixon and Jack Barrat.

They screen the market to identify undervalued companies whose share prices trade below the replacement cost of their assets, with a preference for companies that have strong balance sheets, produce high levels of cash and have greater potential to grow their dividends.

The managers can also invest in bonds that are trading at a better valuation versus the companies’ shares to boost the portfolio’s income.

Analysts at FE Investments said: “The metrics used to assess the valuation of a company, as well as the fund’s exposure to bonds as a means of generating income, are key differentiating factors for the fund, as they are not widely used by other investors.

“The recovery process takes time to come to fruition, and then it needs to be acknowledged by the market – therefore, this is a strategy that requires some patience.”

Source: FE Analytics

At the other end of the spectrum, there are some income funds that have paid out relatively little in dividends. Among all IA UK Equity Income funds with a long enough track record, the average dividend paid out since the end of 2020 was £2,700 – based on an initial £10,000.

Yet WS Guinness UK Equity Income has paid just £1,864.95 during this time. Managed by Tim Guinness, the £1.1m portfolio is one of three that failed to pay out more than £2,000, with VT Tyndall Unconstrained UK Income and State Street SPDR S&P UK Dividend Aristocrats UCITS ETF also on that list.

Turning to the IA UK All Companies sector, the top dividend payer was Dimensional UK Value (£2,754.41), with JOHCM UK Dynamic just behind at £2629.97.

There are some income specialists in the sector, but these appeared further down the rankings. Looking at funds with the word ‘income’ in their name, the passive Xtrackers FTSE 100 Income UCITS ETF was top of the list, paying our £2,552.64, while HSBC UK Growth & Income was just £162 behind. Both were below the IA UK Equity Income sector average.

It was a stark drop from here, however, with Invesco UK Equity High Income (UK) paying out £2,270 over five years – around £430 below the income sector average – while Invesco UK Equity Income (UK) was lower at £2,002. The lowest of these income funds was Trojan Income, which paid out just £1,498.28.