Banks and miners give income investors a boost

Income-seeking investors will be pleased to hear that UK dividend growth beat expectations during the third quarter of the year.

From July through September, total payouts (excluding special dividends) rose by 6.9% year-on-year to £31.6 billion across the UK stock market, according to Link Asset Services’ UK Dividend Monitor. This represented the biggest payout on record since Link launched this study in 2007.

Mining companies contributed the most to dividend growth, with payouts up £1.4 billion year-on-year, which represented a 41% increase. Glencore was a key driver: the commodities trader almost tripled its total dividend payment to £1.1 billion. Meanwhile, BHP Billiton and Evraz also made big increases.

Banks: the comeback kings

Banks, which have largely remained in the shadows for UK income investors over the past decade, staged a comeback over the three months to October. Barclays led the way, raising its interim dividend by 150% (£257 million) year-on-year, while Lloyds increased its payout by a tenth.

Retail companies on the other hand – especially those on the beleaguered high street – proved disappointing. For example, M&S and Dixons Carphone delivered flat dividends, while Debenhams halved its payout.

The study showed that the largest 100 listed companies in the UK experienced stronger dividend growth than medium-sized companies, as measured by the FTSE 250 index. FTSE 100 dividends rose by an average of 3.7% versus 2.7% for FTSE 250 stocks.

Dividend growth to continue?

What does this mean for UK equity income investors? In light of the strong third quarter, Link has upgraded its forecast for total headline dividends in 2018 by £1.1 billion to a record £99.5 billion. This would represent a 4.8% increase on last year. They point to sterling weakness, which can provide an earnings boost for multi-national companies, as well as the banking sector’s ongoing recovery.

It is worth noting that the start of the fourth quarter has been marked by a profound sell-off in global markets, which indicates that the fourth quarter may not go as smoothly as some hoped.

Against this backdrop, here are three Elite Rated UK equity income funds which have the potential to deliver for investors looking ahead:

• City of London Investment Trust
  This is one of the best known ‘dividend heroes’ among the investment trust universe, having raised its dividend for 52 consecutive years. Manager Job Curtis invests predominantly in larger UK companies with international exposure and has a strong track record of generating steady returns over a long period of time. With a yield of 4.2%*, we view this as a core UK equity income pick.
• Schroder Income
  This fund has benefited from the dividend growth that has come through across the UK’s mining and banking sectors – two areas which have long been on fund managers Nick Kirrage and Kevin Murphy’s radar. Year-to-date Schroder Income’s value approach has paid off: the fund is top of the Investment Association’s UK equity income sector year-to-date with a 4.2%** return versus a 5.1%** loss by the sector average.
• Livingbridge UK Multi-Cap Income
  We like that this fund has a strong process and is able to draw on manager Ken Wotton’s unrivalled expertise in the small cap space. The strategy is a good option for anyone looking to access the exciting growth potential that smaller businesses can offer – as well as the dividend growth that can follow. Although Ken has the flexibility to invest across the market cap spectrum, more than 80% of the portfolio is currently invested in micro and small caps.

*Source: Trust fact sheet, September 2018

**Source: FE Analytics, total returns in sterling, 1 January 2018 to 23 October 2018