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Income Stock Picks of the Top Equity Fund Managers

UK equity income funds tend to invest in the same stocks, meaning investors with more than one may be more exposed to certain companies than they expect

David Brenchley 27 October, 2017 | 3:12PM

The UK stock market is home to a number of high-yielding stocks. This means, in an age of lower for longer interest rates, funds in the UK equity income sector are becoming more and more in demand for investors looking to top up their income.

The FTSE 100’s 12-month forward yield is 3.8% according to the latest Capita Dividend Monitor. However, AJ Bell’s latest Dividend Dashboard showed there’s a stark concentration of dividends in the UK’s blue-chip index.

It found that 10 companies – a tenth of the index – will account for 58% - more than half – of all FTSE 100 dividend payments for 2017.

Not only that, but the forecast earnings cover – a measure of how safe a company’s dividends are that divides earnings per share by dividends per share – for 2017 for the index is just 1.7 times. Of the top 10 payers, that falls to just 1.2 times. Investors should ideally looking for above 2 times tor maximum comfort.

That brings problems for those looking to maximise the yield of their portfolios. And it would be folly to ignore this year’s travails of Pearson (PSON) and Provident Financial (PFG) – previously two of the top-yielding firms.

Highly damaging profit warnings from both led to the former slashing its pay-out and the latter suspending its altogether. “Both had been offering apparently juicy yields but with skinny earnings cover,” explains Russ Mould, investment director at AJ Bell.

What are the Professionals Picking?

A look under the belt of the largest UK equity income funds, including Woodford Equity Income, Schroder Income and JOHCM UK Equity Income, using Morningstar’s X-Ray Tool show that big bets are being taken on the same stocks.

Three companies are owned by eight of the 10 biggest funds in the sector by assets under management. These are AstraZeneca (AZN), Royal Dutch Shell (RDSB) and Lloyds Banking Group (LLOY). While the latter looks to be performing well for shareholders, the two others have had rollercoaster rides year-to-date.

Woodford and the Threadneedle UK Equity Income fund are taking big bets on Astra, while Shell accounts for more than 4% of the portfolios of five funds, including almost 9% of the JOHCM one. Shell will account for 14% of 2017’s FTSE 100 dividends, but its 6.6% yield is nowhere near covered by its earnings.

GlaxoSmithKline (GSK), BP (BP.), Vodafone (VOD), and HSBC (HSBA) are all owned by more than half of the funds and will contribute a quarter of this year’s dividends. Imperial Brands (IMB), Legal & General (LGEN) and Aviva (AV.) are also popular.

What this points out for investors is that if you prefer to park your money into funds, question whether you need more than one UK equity income fund as most are similar. JOHCM UK Equity Income is Silver rated by Morningstar analysts.

Looking further afield, the Gold-Rated Veritas Global Equity Income fund yields 3.66%. While it has a fifth of its portfolio invested in the UK, only BP makes the top 10. Its two top holdings are aerospace firms – France’s Safran (SAF) and the Netherlands’ Airbus (AIR).

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article
Security NamePriceChange (%)Morningstar
Rating
AstraZeneca PLC4,975.00 GBX-0.72
Aviva PLC500.50 GBX0.46
BP PLC493.10 GBX0.40
CF Woodford Equity Income C Sterling Acc127.73 GBP0.29
GlaxoSmithKline PLC1,308.00 GBX-0.76
HSBC Holdings PLC731.60 GBX-0.11
Imperial Brands PLC3,049.00 GBX-0.39
JOHCM UK Equity income B GBP Acc3.54 GBP0.20
Legal & General Group PLC268.90 GBX0.41-
Lloyds Banking Group PLC65.99 GBX-0.11
Pearson PLC697.50 GBX0.43
Provident Financial PLC915.00 GBX1.67-
Royal Dutch Shell PLC B2,373.00 GBX-0.23
Safran SA87.21 EUR-0.84
Schroder Income Acc9,060.05 GBP0.23
Threadneedle UK Eq Inc Rtl Inc GBP97.08 GBP0.14
Veritas Global Equity Income A GBP192.82 GBP0.42
Vodafone Group PLC228.70 GBX0.11
About Author David Brenchley

David Brenchley  is a Reporter for Morningstar.co.uk