Funds such as Neptune Income, Franklin UK Equity Income and Majedie UK Income have some of the best track records in the IA UK Equity Income sector when it comes to dividend growth over recent years, according to FE Trustnet research. 
While the Brexit result has dented sentiment towards UK equities, the IA UK Equity Income sector remains one of the largest peer groups in the Investment Association universe and demand for income seems like it will remain an ongoing theme within markets.
Although the sector is closely watched by investors, it can be challenging to find out how its members have performed when it comes to their actual income payouts. In this article, we look at the funds that paid out the most income over the five years up to the end of 2017 as well as highlighting the funds that were able to persistently grow the level of these payouts over the period in question.
The table below shows all the funds in the IA UK Equity Income sector that paid out more than average on an initial investment of £10,000 on 1 January 2013 up to 31 December 2017. The average fund in the peer group paid out £2,778.57.
Source: FE Analytics
It should not be too surprising that the highest payouts have come from ‘enhanced income’ funds, which use derivatives to essentially sell some of their capital growth for higher income distributions.
Tim Rees’ £107.2m Insight Equity Income Booster fund fits into this category. Currently yielding 7.58 per cent, the fund focuses on larger UK companies as Rees sees them as offering more stable cashflows and top holdings include Royal Dutch Shell, BP and HSBC.
The next two funds - Schroder Income Maximiser and Premier Optimum Income – are also ‘enhanced income’ funds as is Fidelity Enhanced Income, in sixth place.
MI Chelverton UK Equity Income, in fourth, is not the typical UK equity income fund either as managers David Horner and David Taylor specialise in small caps rather than the FTSE 100 dividend stalwarts usually associated with the sector.
Majedie UK Income, Marlborough Multi Cap Income and LF Miton UK Multi Cap Income are also examples of funds that have built up high income payouts without putting all their attention on large caps. However, the presence of Vanguard FTSE UK Equity Income Index on the list shows that a portfolio of the market’s biggest names can still lead to better than average income distributions.
While these are the funds that have paid out the most income over the past five years, investors are also interested in portfolios that can grow their payouts over time. So we also looked at the funds that have performed best from a dividend growth point of view.
The funds in the following table have grown their income payout in every calendar year between 2013 and the end of 2017 and by an average of more than 10 per cent. The average fund in the sector achieved growth of 8.5 per cent over the period in question.
As can be seen, Robin Geffen’s £202.9m Neptune Income fund sits at the top after growing its payouts by an average of 23.1 per cent. Over the full five-year period, it has paid out a total of £2,718.08 on an initial £10,000 – which is just below the average and ranks it 34th out of 75 funds in the sector.
Source: FE Analytics
Geffen builds the portfolio using an equally-weighted approach, ensuring that all holdings contribute meaningfully to its overall yield. Holdings are grouped into three silos: ‘Steady Eddies’, ‘Hidden Fruits’ and ‘Tactical Plays’.
“This carefully diversified approach means that not only is the portfolio very well protected against different economic and market shocks, it is also highly differentiated to our peers,” the manager said.
“Firstly, it means we carry less ‘dividend risk’ than the large majority of funds in the IA UK Equity Income sector. The average fund in the sector relies on its top 10 holdings to generate 43 per cent of its yield, while ours usually ranges between 15 per cent and 30 per cent. In our view, the commonly used ‘barbell’ approach to equity yield, which puts the strain on a small number of stocks, not only puts investors’ income on a weak footing, it also puts their capital at risk.
“Secondly, our distinctive approach means we tend to hunt in different areas for yield than our peers, an example being our overweight position in technology. People do not often equate tech stocks with equity income but many of these companies are cash-rich, significantly less macro-sensitive than other traditional equity income sectors and these days pay dividends.
“In our view, there are plenty of companies in our investment universe that produce either yield or the prospect of dividend growth, but investors need to look beyond the traditional sectors to find them. This is not an environment for complacency.”
HSBC Income is in second place with average dividend growth of 20.6 per cent but its total payout of £2,367.50 puts it in 67th place in the sector. Some of funds on the list are also towards the bottom when it comes to total income distribution, such as Barclays UK Equity Income – in 42nd place – and NFU Mutual UK Equity Income – ranked 72nd.
That said, some of the funds with strong track records for income growth have also managed to pay out more than the average member of IA UK Equity Income sector over the period we examined. The product in third place – Colin Morton’s Franklin UK Equity Income fund – is also the 15th highest payer overall after handing out £2,953.29 to investors over the past five years.
Source: FE Analytics
Majedie UK Income, which is in fourth place for growth after lifting its payout by an average of 12.2 per cent a year, has performed even better; as we have already seen, its total payout of £3,544.14 over the five-year period is the fifth-highest in the IA UK Equity Income peer group.
The £964m fund is run with a high conviction approach by FE Alpha Manager Chris Reid and Yuri Khodjamirian. The portfolio has 60.7per cent in the FTSE 100 with another 19.3 per cent in mid caps and 8.7 per cent in the FTSE Small Cap index; top holdings include Royal Dutch Shell, Legal & General and Direct Line Insurance.
LF Miton UK Multi Cap Income and Marlborough Multi Cap Income are two more funds that have established a good dividend growth record over recent years while paying out some of the sector’s highest cumulative incomes.
Vanguard FTSE UK Equity Income Index – the IA UK Equity Income sector’s only index tracker – also deserves a mention as it has grown its dividend by an average of 10.3 per cent over the five years examined in this research.