Seven out of 10 UK equity income funds hold these 10 companies
More than a quarter (26%) of the money managed by UK equity income funds is invested in just ten dividend-paying companies, according to research by fund managers at Henderson Global Investors.
Seven in 10 of the 52 funds analysed in the study, which included open-ended funds alongside investment trusts valued above £200 million, hold all of these top 10 companies.
Henderson says the findings are symptomatic of a structural issue in the UK stock market: the top ten companies pay half of all UK dividends, with the top 20 companies paying 70% of all UK dividends.
The ten companies are:
- British American Tobacco
- Imperial Brands
- Legal & General
- Royal Dutch Shell
Ben Lofthouse, fund manager of Henderson International Income Trust says: “As equity income portfolios get larger, fund managers are forced to hold these same largest companies in order to receive enough dividends to pay all of their shareholders. It is further evidenced by the fact that, of the largest equity portfolios in the UK, the average percentage of the total portfolio held in these top ten stocks was 39%. When the liquidity pool is small, fund managers simply have little choice.”
Where should I invest for UK equity income?
As part of our First 50 Funds for beginners, Moneywise recommends three open-ended funds for UK equity income:
CF Woodford Equity Income
Managed by the UK’s best- known fund manager, Neil Woodford, this invests primarily in UK-listed companies. It aims to provide a reasonable level of income together with capital growth.
Marlborough Multi Cap Income
With a bias to small and mid-cap companies, it seeks to generate an attractive and growing level of dividend income, plus long-term capital growth.
We also recommend two investment trusts for UK stock market income:
A core holding for investors looking for long-term growth in income and capital from UK shares. It has very low charges and a lower-risk, cautious investment style.
Finsbury Growth and Income (FGT)
Its aim is to provide income and growth by investing primarily in UK-listed companies. Manager Nick Train’s long-term patience and deep understanding of his companies sets him apart from his peers.
What are dividends?
Dividends are the amount of a company’s profits that are returned to shareholders in the form of a payment. The most common dividend frequencies are annually, biannually and quarterly. There are no uniform calendar dates for when dividends are paid; it depends on the individual company's ‘fiscal calendar’, the period used by the company for accounting and budget purposes.
For some investors, stable, high dividend payments are an essential reason for owning the shares they do – they use them to pay bills or, if they get enough back, to live on completely. Other people chose to reinvest dividends straight back into shares in order to take advantage of compounding.
Companies offer dividends as a reason to own their shares, and a big company cutting back on its pay-out is often big news. It’s usually interpreted as a bad sign – the company isn’t making a big enough profit, isn’t confident about the future, or is running out of capital.
However, sometimes a dividend is cut because the company would rather reinvest in itself– for example, to open a new site or fund an acquisition. In this case it’s short term pain for a hopefully rosier future, but what’s key is communicating this sufficiently well to investors.
The term is interchangeable with stock exchange, and is a market that deals in securities where market forces determine the price of securities traded. Stockmarket can refer to a specific exchange in a specific country (such as the London Stock Exchange) or the combined global stockmarkets as a single entity. The first stockmarket was established in Amsterdam in 1602 and the first British stock exchange was founded in 1698.
An individual employed by an institution to manage an investment fund (unit trust, investment trust, pension fund or hedge fund) to meet pre-determined objectives (usually to generate capital growth or maximise income) in prescribed geographic areas or investment sectors (such as UK smaller companies, technology or commodities). The manager also carries the responsibility for general fund supervision, as well as monitoring the daily trading activity and also developing investment strategies to manage the risk profile of the fund.
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
Investment trusts are companies that invest money in other companies and whose shares are listed on the London Stock Exchange. As with unit trusts, private investors buying shares in an investment trust are buying into a diversified portfolio of assets (to reduce risk), which is managed by a professional fund manager. Investment trusts differ from unit trusts in two important ways: they are listed on the stockmarket and so are owned by their shareholders and are closed-ended funds with a finite number of shares in issue. This means the share price of investment trusts might not reflect the true value of the assets in the company (known as the net asset value, or NAV) and if the NAV value of a share is £1 and the share price in the market is 90p, the trust is said to be running a discount of 10% to NAV. But this means the investor is paying 90p to gain exposure to £1 of assets. Investment trusts can also borrow money and use this money to buy investments. This is known as gearing and a geared trust is thought to be more of an investment risk than an ungeared one.