Henderson High Income manager David Smith has upped his exposure to the banking sector where he predicts dividends could grow “aggressively and quickly”.
Mr Smith has been increasing his weighting to Lloyds and took a new position in Barclays earlier this year.
Last month, Barclays’ chief executive Antony Jenkins departed due to a row over cost cutting and was replaced by interim boss John McFarlane, triggering a jump in the bank’s share price.
“We have been adding to a position in Barclays and could see a good turnaround story with the new chief executive,” Mr Smith said.
“I think it’s the dividend growth we are looking to see from the likes of Barclays and Lloyds.
“After the financial crisis the regulators forced them to shore up their balance sheets and now all that excess cashflow can be returned to shareholders.
“Their payout ratios should get to normalised levels quite aggressively and quite quickly, so that should be very attractive,” he added.
The yield on the Henderson investment trust is currently around 4.9 per cent, which the manager acknowledged had fallen recently, but he argued the rate was still compelling given the current low-income environment.
“The yield is the same as 12 months ago but given where yields have gone with all other asset classes – bonds, property and equity yields have all dropped – 4.9 per cent still looks really appealing,” he said.
Elsewhere, Mr Smith and deputy manager Alex Crooke have taken the fixed income portion of their portfolio down to around 10 per cent as bond yields have continued to disappoint.
“We can go all the way up to 50 per cent if we want to, but that shows our feelings on where bond yields are at the moment – 10 per cent is the lowest it has been historically,” Mr Smith said.
The trust has been underweight the oil and gas sector for some time. Earlier this year, the price of crude oil fell to a six-year low, and the manager said these low levels meant companies may be forced to cut dividends.
However, one sector Mr Smith does have a positive outlook for is telecoms.
“We prefer a Vodafone where the cover on the dividend is not that good at the moment, but that is because [the firm is] going through an investment phase and we are starting to see that growth come through in European revenues,” he said.
According to FE Analytics the share price of the £198m trust has risen by 7.9 per cent in the year to the end of June, compared to a 3.5 per cent return from its benchmark, which consists of 80 per cent FTSE All-Share index and 20 per cent the Merrill Lynch Sterling Non Gilts index.
