More than a quarter (26%) of the money managed by UK equity income funds is invested in just ten dividend-paying companies, according to research by fund managers at Henderson Global Investors.
Seven in 10 of the 52 funds analysed in the study, which included open-ended funds alongside investment trusts valued above £200 million, hold all of these top 10 companies.
Henderson says the findings are symptomatic of a structural issue in the UK stock market: the top ten companies pay half of all UK dividends, with the top 20 companies paying 70% of all UK dividends.
The ten companies are:
- British American Tobacco
- Imperial Brands
- Legal & General
- Royal Dutch Shell
Ben Lofthouse, fund manager of Henderson International Income Trust says: “As equity income portfolios get larger, fund managers are forced to hold these same largest companies in order to receive enough dividends to pay all of their shareholders. It is further evidenced by the fact that, of the largest equity portfolios in the UK, the average percentage of the total portfolio held in these top ten stocks was 39%. When the liquidity pool is small, fund managers simply have little choice.”
Where should I invest for UK equity income?
As part of our First 50 Funds for beginners, Moneywise recommends three open-ended funds for UK equity income:
CF Woodford Equity Income
Managed by the UK’s best- known fund manager, Neil Woodford, this invests primarily in UK-listed companies. It aims to provide a reasonable level of income together with capital growth.
Marlborough Multi Cap Income
With a bias to small and mid-cap companies, it seeks to generate an attractive and growing level of dividend income, plus long-term capital growth.
We also recommend two investment trusts for UK stock market income:
A core holding for investors looking for long-term growth in income and capital from UK shares. It has very low charges and a lower-risk, cautious investment style.
Finsbury Growth and Income (FGT)
Its aim is to provide income and growth by investing primarily in UK-listed companies. Manager Nick Train’s long-term patience and deep understanding of his companies sets him apart from his peers.
What are dividends?
Dividends are the amount of a company’s profits that are returned to shareholders in the form of a payment. The most common dividend frequencies are annually, biannually and quarterly. There are no uniform calendar dates for when dividends are paid; it depends on the individual company's ‘fiscal calendar’, the period used by the company for accounting and budget purposes.
For some investors, stable, high dividend payments are an essential reason for owning the shares they do – they use them to pay bills or, if they get enough back, to live on completely. Other people chose to reinvest dividends straight back into shares in order to take advantage of compounding.
Companies offer dividends as a reason to own their shares, and a big company cutting back on its pay-out is often big news. It’s usually interpreted as a bad sign – the company isn’t making a big enough profit, isn’t confident about the future, or is running out of capital.
However, sometimes a dividend is cut because the company would rather reinvest in itself– for example, to open a new site or fund an acquisition. In this case it’s short term pain for a hopefully rosier future, but what’s key is communicating this sufficiently well to investors.