The most consistent and least reliable UK equity income funds

Research by FundExpert has named the top 10 and bottom 10 UK equity income funds in terms of delivering a growing income stream year in, year out.

Just two open-ended UK equity income funds have grown their dividends every year over the past decade, research has found. The two funds that achieved the feat – out of a pool of 58 – are BlackRock UK Income and Troy Trojan Income, according to data from FundExpert, the analyst.

Brian Dennehy of FundExpert says “consistent growth in income” is the vital component investors should be looking for when selecting an income fund. He adds that on this front two funds have delivered income growth in nine of the past 10 years – JOHCM UK Equity Income and Jupiter Responsible Income; but when the filter is reduced to eight years there is a wider pool of funds.

In the top 10 “saints” table, which ranks income funds in order of consistency of annual dividend growth and percentage payout growth over the past decade, the four aforementioned funds are also joined by Schroder UK Alpha Income, Liontrust Macro UK Equity Income, HSBC UK Growth & Income, Janus Henderson UK Responsible Income, Miton Income and Invesco High Income.

The saints

Fund Yield Consistency 10 yr payout growth Fund Size (£m)
BlackRock UK Income 4.47 10 52.08% 364
Troy Trojan Income 4.33 10 48.47% 2,702
JOHCM UK Equity Income  4.36 9 62.47% 3,400
Jupiter Responsible Inc 4.4 9 21.34% 53
Schroder UK Alpha Income 5.24 8 70.40% 485
Liontrust Macro Equity Income  5.68 8 62.97% 120
HSBC UK Growth & Income  4.28 8 40.79% 964
Janus Henderson UK Responsible Inc  4.3 8 35.15% 161
Miton Income  5.27 8 30.35% 1,320
Invesco High Income UK  3.64 8 27.52% 7,653
Average 4.6 8.6 45.20%  

 

The proof of the pudding is in the eating. The funds most likely to provide a growing income in the future are those who have consistently done exactly that in the past. It always amazes me how many funds are labelled ‘income’ but do not prioritise growing that income, or don’t have starting yield worth having,” says Dennehy.

In terms of the least reliable income funds, Newton UK Income stood out more than any other, with just three years of dividend growth over the past decade. The so-called sinners that have only four years of income growth are Insight Equity Income Booster, Premier Monthly Income and Threadneedle UK Equity Income.

The sinners

Fund Yield Consistency 10 yr payout growth Fund Size (£m)
Newton UK Income  4.21 3 -19.88% 1,278
Insight Equity Inc Bster ** 8.38 4 - 109
Premier Monthly Income ** 5 4 - 245
Threadneedle UK Eq Inc 4.2 4 22.74% 3,890
Neptune Income  3.82 5 19.17% 195
BMO UK Equity Income 4.9 5 14.20% 51
BMO Responsible UK Income  4.3 5 14.12% 317
MI Chelverton UK Equity Income  5.47 5 -3.44% 642
LF Canlife UK Equity Income  3.67 5 -3.53% 235
Schroder Income Maximiser  6.92 5 -13.53% 1,068
Average 5.09 4.5 3.70%  

** Insight Equity Income Booster has nine years of data and Premier Monthly Income has eight years of data.
Data notes: Funds selected from the UK Equity Income and UK All Companies sectors. UK All Companies funds are funds with an income focus and a yield >3.5% as of January 2019. Funds with less than seven years of data, or less than £50m in size, are excluded. Payout growth calculated using Dividend Pay Dates on a calendar year basis.

In the cases of the Insight and Premier funds, though, income payout growth is not the focus. Instead, the funds target a set high yield year to year, and are designed to cater to the needs of investors who want immediate income at the expense of capital growth. These specialist funds employ a special technique that involves the use of derivatives in order to boost the natural income being generated by the fund’s holdings. To achieve this, capital growth is sacrificed.

The findings serve as a reminder to investors that when it comes to seeking out consistent income performers, investment trusts are a superior option versus open-ended funds. This is because trusts can hold back up to 15% of dividends received each year, which means they can build up a reserve to bolster payouts in leaner years.

During the financial crisis the majority of UK equity income investment trusts were able to either maintain or increase their dividends, as they dipped into their reserves. In contrast, virtually all of the UK equity income open-ended funds cut their dividends.

A total of 20 investment trusts have increased their dividends for 20 years or more; view the names that make it into our dividend hero table here.

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