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Written by: Joseph Hill | Hargreaves Lansdown
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The UK is home to a lot of world-class companies with good income paying potential
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Investing in a dividend-paying company can mean your income and capital grow as the company grows
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HL fund analysts look at 2 fund ideas
Dividends have been a key to the UK investment case for a long time. It’s home to a lot of world-class companies, big and small, selling their goods and services around the globe. Investing in a dividend-paying company can mean your income and capital grow as the company grows. For investors, you can see the benefits when dividends land in your investment account. For some, the expectation of a dividend beats investing for growth and not knowing how an investment might perform.
The FTSE All Share index, the broadest representation of the UK market covering 572 companies, is yielding a reasonable 3.9%. This is because of some large, mature companies which can justifiably be thought of as dividend heavyweights. So, it’s not a surprise that the FTSE 100 index, representing the largest 100 companies listed in the UK, has a slightly higher yield than the All Share, at 3.8%.
The 10 biggest dividend-payers in this index are expected to be responsible for about 55% of its total dividends. So there is some concentration risk here. Remember, diversification is key to a portfolio. Biggest companies aside, there’s still a good income opportunity for investors among medium-sized and smaller companies. The FTSE 250 index, representing medium-sized companies, offers a decent yield of 3.45%. These companies which can be at an earlier stage of their development can offer an exciting mix of growth potential and income to investors. Although they are also higher risk than their larger counterparts.
The focus on the Bank of England’s (BoE) monetary policy won’t change any time soon with markets constantly pre-empting when interest rates might fall from the current 5.25%. Rates aren’t expected to rise, but with inflation still above its 2% target, we expect it won’t be until the second half of 2024 before we start to see any cuts to the base interest rates.
How can you invest in the UK for income?
Artemis Income
We think the UK has some exceptional fund managers with great records of adding value. The Artemis Income team are one of the best in the business and are well placed to make the most of UK income opportunities. The experienced trio of Nick Shenton, Andy Marsh and industry stalwart Adrian Frost have over 70 years of investment experience between them and mainly invest in big UK businesses. The fund invests in companies that they think can pay a sustainable income through the market cycle, whatever the economic backdrop. These tend to be businesses with lots of reoccurring revenues. This increases the chance they can retain and grow their customer base, profits, and therefore dividends over time, although nothing is guaranteed.
At the time of writing, the fund yields 3.95%.
Janus Henderson UK Responsible Income
Janus Henderson UK Responsible Income offers something different to a lot of its peers by avoiding companies some might find unethical. Some of these areas, like tobacco and oil & gas companies, feature heavily in traditional equity income funds because of their relatively high dividends. So, this fund could offer some diversification to a traditional equity income portfolio or be a good addition to a responsible portfolio aiming for income.
Manager Andrew Jones is supported by an experienced team with a focus on large and medium-sized companies. Although, the manager does have the flexibility to invest in higher-risk smaller companies too. Jones looks for companies with proven business models, high-quality management teams and strong industry positions. He assesses a company’s ability to defend its position through competitive advantages like brand strength and intellectual property, and whether those advantages can endure.
He also likes companies in a strong financial position, letting them reinvest for future growth, while also rewarding shareholders with rising dividends.
At the time of writing, the fund yields 4.3%.
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