Income investors were cheered this week after research showed that UK dividends reached a new quarterly record high after business paid out a headline £27.2bn between July and September.
Capita Asset Services’ UK Dividend Monitor says this was an increase of 6.8 per cent over the previous year and financials drove dividend growth, aided by the “generous” interim dividend from Lloyds Bank – it’s second of 2015 after the effects of the financial crisis meant it didn’t pay out for six years.
However, the report warned this strong growth is unlikely to last as a number of high-profile businesses could be forced to cut their payouts in 2016 and said it expects dividends to grow by just 3 per cent over the year.
We’ve spent quite a lot of the week looking at UK equity income funds, as you’ll see below in a roundup of our best stories of the week. From everyone at FE Trustnet, have a great weekend.
Which UK equity income funds have the riskiest dividend yields?
With warnings from the Capita UK Dividend Monitor that 2016 might be a tricky year for income investors, news editor Alex Paget put the IA UK Equity Income sector under the spotlight to see which of its members are most at risk of dividend cuts.
Capita said the six large-cap stocks most at risk of cutting over dividends over the next year or so were BHP Billiton, Rio Tinto, Anglo-American, BP, Royal Dutch Shell and HSBC and as the table below shows, five of them are popular holdings within the IA UK Equity Income sector.
Source: FE Analytics, Bloomberg and Miton
Paget also found that 66.61 per cent of IA UK Equity Income funds hold at least one of those five stocks, 48.01 per cent hold at least two and 26.19 per cent hold at least three in their top 10. He then looked at the funds which generate the highest proportion of their current yields from the companies in question.
The mining sector was the one arguably most at risk of dividend cuts next year and our research suggest that a hefty 15.17 per cent of SJP UK Income’s current 4.01 per cent yield stems from BHP Billiton and Rio Tinto.
While this fund seems to be most at risk from a cut in the mining sector, take another look at the article to see which others are exposed to potential pitfalls in 2016.
The stocks UK equity income funds have been ditching in 2015’s market correction
Sticking with the UK equity income theme and senior reporter Daniel Lanyon looked to see which stocks funds in this space have been selling since the market entered a more turbulent period in April.
FE Analytics shows BP and GlaxoSmithKline are the most reduced positions, with the average fund having gone from overweight to underweight over the six-month period. Only Just 11 out 84 funds, or 13 per cent, are now overweight BP and just one– the £6.7bn Artemis Income fund – is overweight GlaxoSmithKline.
BP has been hit by the weakness in the oil price and worries that this puts its much sought-after dividend in peril, while its yield has risen to nearly 8 per cent off the back of the latest round of selling.
Meanwhile, much of the weakness for GlaxoSmithKline centres on concern over its research & development pipeline, as investors fret about how many drugs it can bring to market in the next five years or so.
Woodford IM: This “sharp and unbalanced” rally won’t change anything for our funds
Markets have rallied over recent weeks, but much of the buying has centred on energy stocks and other cyclical sectors – the ones hard hit when fears over global growth contributed to the earlier sell-off. This means defensively positioned managers like Neil Woodford have lagged.
Performance of fund vs sector and index over 1 month
Source: FE Analytics
Mitchell Fraser-Jones, head of investment communications at Woodford Investment Management, said the reasons behind the rally are “perverse”, as they are seem to be based on the Federal Reserve’s decision to delay interest rate hikes after weak employment data. He argues that markets have been dominated by flows rather than fundamentals of late.
“In recent months, many short-term market participants, such as hedge funds, have been flocking into the same popular positions to such an extent that the market became temporarily lopsided,” he said.
“This appears to be an increasing feature of modern markets, now heavily influenced by high frequency trading, black-box quantitative models and speculative market participants. In the short term, these market participants can provide deeper market liquidity but they can also drive asset prices away from their fundamental value.”
However, Fraser-Jones added that Woodford remains convinced by the fundamentals of areas such as healthcare, which have lagged in the recent rally and contributed to his underperformance. As such, there are no plans to adjust positioning on the back of short-term factors.
“Although recent short-term performance has been challenging and uncomfortable, we remain convinced that our strategy remains highly appropriate and especially so for the prevailing economic conditions,” the spokesman said.
“The intense market rotation does seem to have lost a bit of steam in recent days, which is encouraging but what happens over the remainder of 2015 is anyone’s guess – that is why we invest for the long term.”
Why Personal Assets will continue to hold what everyone else hates
Assets such as gold bullion, index-linked bonds and tobacco stocks have been out of favour among investors recently but star manager Sebastian Lyon has no plans to drop these from his Personal Assets Investment Trust in the foreseeable future.
Since Lyon took charge of the close-ended fund in March 2009, it has lagged its FTSE All Share benchmark by a wide margin. However, this might not be surprising given the manager’s focus on capital preservation in what has been an environment where markets ground higher on the back of ultra-loose monetary policy.
Performance of fund vs index under Lyon
Source: FE Analytics
Some of this underperformance was the result of the portfolio’s more contrarian holdings but Personal Assets chairman Robin Angus explained why they are critical to the trust’s make-up.
For example, he explained about the 10 per cent gold allocation: “Sometimes people talk about our holding of gold as if we regarded it as a commodity. We don’t. To us it is liquidity and we hold it because we don’t see an end to central banks’ monkeying around with fiat money [money issued by sovereign states],” Angus said.
“Gold doesn’t default or impair, and now that negative real interest rates have morphed into negative nominal interest rates, holding gold has no opportunity cost when compared to cash deposits. We believe that when faith in central bankers is put to the test, people will return to gold as they lose faith in sovereign money.”
The five highest-yielding equity investment trusts
Over on Trustnet Direct, Anthony Luzio looked at which investment trusts (with a market cap in excess of £80m) that invest in equities have a yield of 4 per cent or higher.
Many of the highest yielders on the list focus on sectors facing well publicised problems at the moment, such as mining and Latin America.
This means their high headline figure may have had more to do with the fact their share price has fallen recently, making their most recent dividend payout a higher percentage of this figure.
However, one of the names on the list was Merchants Trust, which has managed to raise its dividend in every one of the past 33 years.
