Standard Life Investments explain how income seekers can still find excellent opportunities within the UK despite the EU referendum through the Standard Life Investments UK Equity Income Unconstrained Fund.
Investors seeking a source of regular income are going through a difficult time. While the UK economy has held up better than initially feared following the EU referendum, the Bank of England has cut interest rates further leaving government bonds offering record low yields.
In this regard, UK equities present a good opportunity for income seekers. Dividends from UK companies currently offer an attractive yield premium over both cash and government bonds. Many of these companies enjoy positive cash positions, giving management teams considerable autonomy on how best to deploy their cash. Against this backdrop, numerous firms have the optionality to increase payout levels sustainably, resulting in further strong dividend growth.
Identifying these income opportunities remains a crucial consideration, particularly in light of high levels of sector divergence and mixed corporate fundamentals. Indeed, many large-cap income stocks face the prospect of disappointing earnings growth and low dividend cover, raising the prospect of high-profile dividend cuts in the years ahead.
Standard Life Investments believe their UK Equity Income Unconstrained Fund is ideal for those investors seeking a premium income, alongside the potential for capital growth over the longer term. Seeking a yield that is 110% of the FTSE All-Share Index yield (over rolling three-year periods), the unconstrained mandate allows fund manager Thomas Moore to broaden the investable universe beyond the usual FTSE 100 income stalwarts.
In managing the Fund, Thomas takes concentrated (but diversified) positions in the strongest stock ideas, regardless of their benchmark weightings. By taking a total return approach, Thomas can also seek stocks with attractive dividend growth potential alongside holdings that deliver a premium yield to that of the market. Stocks selected for inclusion in the portfolio therefore meet not only the preferred yield characteristics, but also have an ability to generate capital gains, to pay special dividends and/or to increase their payouts.
A further benefit of the flexible mandate is that Thomas has the ability to take advantage of stock opportunities right across the market capitalisation and style spectrum as they arise. This can be particularly useful when investing for income. Analysis of dividend payout levels across FTSE 250 constituent stocks versus those of FTSE 100 constituent stocks suggests the mid-cap index exhibits a more robust track record of dividend growth. Indeed, over the 29 years since the FTSE 250 came into existence it has reported a rate of dividend growth significantly in excess of the FTSE 100.
Looking ahead, as UK companies come under the spotlight following the UK's EU referendum, Standard Life Investments believe their research intensive, bottom-up approach is the best method of spotting opportunities amid the market noise. Utilising the research insights generated through their full UK equity market coverage, they remain well placed to uncover UK stocks that offer the prospect of sustained dividend growth with healthy dividend cover and low debt levels.
As a result, investors should continue to benefit from the regular, long-term income stream that the Fund provides.
