The latest edition of the Computershare dividend monitor reported that UK dividends fell by more than 8 per cent in Q3 from the same period last year to £25.6bn, marking a significant slowdown for yield hunters.
As we covered last time out, this is predominantly due to a slump in mining payouts but Computershare also mentioned lower one-off special dividends, a stronger pound, and more share buybacks as other causes of the dip.
Add this to general malaise around UK equities and the news we covered recently that one allocator has sold out of their UK equity income exposure entirely, and you may be forgiven for thinking this asset class is facing some headwinds.
Not so. It turns out the role of UK equity income in portfolios is firmly entrenched.
We spoke to a couple of DFMs about the journey of investing in the sector since interest rates began rising in 2022 and bonds reappeared at the income party for pretty much the first time since the turn of the millennium.
Several allocators pointed to the fact the IA UK Equity Income sector has outperformed both the UK All Companies and the IA Strategic Bond sector since 2022, achieving an annualised growth rate of around 5 per cent.
“Investors should look at the prospects for total returns rather than simply yields,” said Daniel Lockyer, senior fund manager at Hawksmoor. “The cheap valuations of UK equities, together with mid-single-digit earnings growth, mid-single-digit dividend growth, share buybacks adding a few per cent and potential for M&A, should mean the prospective total returns for UK equities are greater than bonds too.”
Paul Angell, head of investment research at AJ Bell, said taking equity risk was perpetually attractive because it allows you to benefit from dividend growth.
"At the margin, equities face stiffer competition from higher bond yields but the dynamics underpinning the yield are entirely different," he said. "What investors should really consider is the trade-off between security of yield and growth potential.
"Bonds give a lot better security of yield, but you give up all the growth potential and in most cases any defence against inflation."
For some, it clearly pays to be a bit more adventurous than merely relying on fixed income for safety.
AJ Bell, like several of the allocators we follow, uses Evenlode Income and Man GLG Income, plus the less popular Blackrock Income. The first two we have covered extensively and are held by 11 and nine, while the Blackrock mandate is held by just two DFMs.
Evenlode’s popularity continues to rise – despite being a somewhat idiosyncratic UK equity income fund – indeed Marlborough recently increased their holding as well as adding the fund to some portfolios where it was not held previously.
Meanwhile Hawksmoor looks across the market cap spectrum for dividends, preferring instead to use Gresham House UK Multi-Cap Income and Downing UK Small and Mid-Cap Income.
So what’s the outlook now rates are coming down?
Angell imagines that falling yields will spur some investors from fixed income back into equities, though perhaps it might have been better if they’d stayed put all along.
“These ‘tourists’ will have achieved a decent yield but at a heavy opportunity cost, given that most major equity markets have advanced over the last two years,” he said.
