When building an equity income portfolio there may be a temptation to focus on companies and geographies with a strong track record for dividends.
Indeed, certain geographies have more of a dividend culture than others, notes Artemis investment director Josh Passmore. “For example, companies listed on the UK stock market have a longer history of paying dividends to shareholders than companies listed on the US or Asian stock markets,” he adds.
But diversification is naturally still key.
“Much of the UK equity income conversation is focused on a narrow set of large companies,” says Olivia Geldenhuys, an investment director at Schroder Investment Solutions. “This overlooks businesses outside the FTSE 100 with strong dividend cover and a track record of growing dividend distributions.
“While many of the better known, traditional equity income stocks focus on the FTSE 100, there are more than 550 dividend-paying companies across the entire UK equity market. Many of these outside the FTSE 100 have attractive levels of earnings growth that can underpin sustainable and growing dividends.
“Dividend cover is an important consideration for income investors. It’s a simple measure that shows the amount of profit a company has available to meet its obligations to pay shareholders a dividend. Cover below 1.5x can put a stock at risk of reducing or postponing a dividend, since it has less flexibility to continue paying a dividend should its profits fall.”
Geldenhuys adds: “A key holding in our portfolio is the Man GLG Income Professional fund, which targets three types of income opportunities. The first is undervalued companies; the second is dividend growth names with strong balance sheets; and lastly, a small allocation to bonds with equity-like returns in a lower risk section of the capital structure.”
Abrdn Equity Income Trust manager, Thomas Moore, also considers the full UK market cap spectrum.
“I decided that rather than spreading my net too far geographically, I would actually spread my net down the market cap spectrum,” he says. “So I would be willing to look at stocks and market cap as low as around £100mn. That opens up hundreds of UK companies, and it provides me with a huge range of stocks from which I can select some winning ideas.
“And obviously the UK equity market is very international, because for historical reasons, there are lots of companies that generate revenues overseas, and we've had foreign companies listing here in London, so we've got a lot of choice geographically within the UK equity market.”
Ben Gutteridge, investment solutions director at Invesco, likewise says there is an “excellent investment opportunity” within UK equities, especially for investors looking for diversified sources of income.
“Not only do some fabulous consumer and healthcare brand names reside within our market, offering considerable global earnings power, but a domestic economy, outstripping some very downbeat expectations, may further homegrown business performance.
