Although UK dividends are forecast another bumper year, there will be stocks that disappoint. UK equity income managers tell Paul Burgin how to avoid them.
Last year was a bumper one for UK dividend hunters. British corporates delivered a record £80.4bn dividend payout, an increase of 16.2% over 2011.
Early payment of HSBC’s third interim dividend and a total of £6.6bn in special dividends from the likes of Vodafone helped swell the total, according to the Capita Registrars Dividend Monitor report.
Such stellar dividends spurred performance in the UK Equity Income sector. Returns averaged 38.9% over the year to 31 March, according to Morningstar. All but one fund – Elite Charteris Premium Income – achieved double-digit total returns.
Can bumper dividends lift UK equity income again in 2013?
More to come?
There is broad agreement among UK equity income managers that dividends should increase this year. Richard Wilmot, manager of the Newton Higher Income fund, expects dividend growth of around 10% during 2013.
But he warns that not all dividend-payers will deliver.
“A group of stocks will disappoint, another will surprise. It is the composition that will change,” he says.
Wilmot points to diverging dividend growth and payouts across industry sectors. Life assurers Aviva and RSA both recently cut payouts from previously high levels, causing their share prices to tumble.
More positively, Prudential increased its dividend by 16%, while Standard Life increased its regular payout and announced a special 12.80 pence dividend.
Wilmot took over the Newton Higher Income fund in December last year.
Previous manager Tineke Frikkee had focused on maintaining yield, leading to total return underperformance. Wilmot embarked on a radical re-work of the investment strategy and portfolio.
“The compelling evidence is that businesses with high yields are less able to grow them and are more likely to cut them,” he admits.
Cutting the fund’s distribution levels reduced dependence on unreliable high yielders. It also opened the portfolio to more consistent businesses with both capital and dividend growth potential.
Wilmot also allowed in more non-UK names. Concentration levels were reduced too. The top ten stocks accounted for more than 58% of the portfolio in January. They now account for less than 40%.
The changes were accomplished ahead of schedule. Wilmot says they are already delivering results, with the Newton Higher Income fund outperforming in the last quarter.
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