Britain’s small army of income investors are on track to receive a bumper payout this year after dividends reached a record £28.5billion over the summer.
Dividends grew by 14.3 per cent year-on-year in the three months to September, putting investors in UK-listed shares on track for a record year of payouts – bigger even than the previous high of 2014.
That came despite the benefits falling away from bigger dollar-denominated payouts for UK firms triggered by the pound’s devaluation after the Brexit vote, according to the Capita Asset Services Dividend Monitor.
The third-quarter dividend boost will help those invested in both individual shares and hugely popular UK income funds. We take a look at what’s happening and get four top income fund picks to invest in Britain and overseas.
Cooking up a storm: UK dividends soared 14.3 per cent to a record £28.5bn in the third quarter, thanks largely to special dividends issued by contract caterer Compass
Why are dividends up?
The report has upgraded its dividend forecast by more than £3billion to a milestone £94billion by the end of the year – which would eclipse the previous record set in 2014.
The increase was in part driven by ‘one-off’ special dividends that rose by two-fifths to £1.5bn – thanks largely to contract caterer Compass, which distributed £960m on top of its regular dividend.
The FTSE 100 food and support services business opted to return the amount to shareholders after it was unable to identify large-scale acquisition deals earlier this year.
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What’s more, more than two-thirds of the £3.6bn increase in payouts came from the mining sector off the back of a rebound in commodity prices.
Capita’s report also found shares remain the most attractive income generators among the major asset classes.
The prospective yield over the next 12 months is 3.7 per cent. FTSE 100 listed firms will offer a smidge over 3.8 per cent, while the return for medium-sized companies is 2.7 per cent.
Where are dividends coming from?
Catering and mining aside, performance from UK plc was broadly positive at sector level during the third quarter, according to Capita.
In industrial goods and support services, there was good news from Rolls Royce, which restored its payout, while BT’s payout pushed telecoms higher.
In the banking sector, Lloyds Banking Group continued to provide almost all the growth.
Retail was a mixed bag: Sainsbury’s cut its payout on poor profit performance, and Marks & Spencer did not repeat its special dividend of last year, while clothing retailer Next paid the second in a series of four specials, designed to return surplus cash to shareholders, inspiring confidence in the company’s financial position against a more difficult consumer spending backdrop.
Food wholesaler Booker, currently the subject of a takeover bid by Tesco, also paid a hefty special. Elsewhere, dividends from the oil, pharmaceuticals, and utilities sectors were broadly flat year-on-year.
Four of the best income funds
Many shares offer the opportunity to generate income from your investment, but the selections individual investors make and portfolios they build can often prove haphazard.
You can outsource this process completely by investing in a fund or investment trust for income. With these, the manager uses their expertise to build a diversified portfolio of stocks so you don’t have to.
As dividends rise, Maike Currie, investment director for Personal Investing at Fidelity International, has suggested four funds for income-hungry investors who would rather not cherry-pick their own stocks.
Invesco Global Equity Income: Managed by veteran investor Nick Mustoe, the fund looks for attractively valued companies with strong balance sheets, cash flows, and management teams – indeed, the types of companies sought after by almost all equity income investors.
What distinguishes Mustoe’s approach is the depth of expertise he deploys to find the very best ideas in a crowded market.
JOHCM UK Equity Income Fund: Lead manager Clive Beagles has substantial fund management experience, having previously managed the Newton Higher Income Fund.
The fund’s investment process focuses on dividends, with a strict yield discipline whereby every single stock in the fund must yield more than the market average on a 12-month prospective basis.
This fund has a value bias, but companies will only be bought if they have the ability to grow their earnings, and dividend, over time.
Fidelity Global Dividend Fund: This is a solid option for someone looking for an equity income fund that benefits from a global approach.
Manager Dan Roberts scours the globe for attractive income streams but never compromises on quality, given his razor-sharp focus on preserving client capital.
Invesco Perpetual European Equity Income Fund: The fund is managed by Stephanie Butcher with a focus on finding dividend-paying companies with attractive valuations.
She is less concerned about the sector or country in which a company resides and does not shy away from the out-of-favour areas of the market where the best opportunities are often found.
How to beat inheritance tax (and should we take from older savers to help the young): The This is Money podcast
Inheritance tax is one of the most hated around.
Despite the fact that most people will never leave enough wealth to have it charged on their estates, we really don’t like the idea of 40% above a certain amount going to the taxman.
But IHT is also a tax that can be avoided.
On this week’s podcast, Simon Lambert, Sarah Davidson and Georgie Frost look at how and learn more about the Chancellor’s suggested plan to help the young by taking money from the old.
Plus, all the other essential money news you need to know about this week.
