- Headline market dividends are forecast to rise in 2024 to £94bn.
- Share buy backs across UK plc boost total shareholder yield to 6.1%.
- Attractive dividends, material share buy backs and valuation support offered by the UK discount make it a good time to invest.
Joseph Hill, senior investment analyst, Hargreaves Lansdown:
“The UK’s heritage as a leading income market is well established and over most of the last 10 years, the UK equity market yield has been significantly higher than the yield offered by gilts. However, gilt yields are now higher than they have been for a number of years, offering a more attractive return profile, assuming they are held to maturity. Income-seeking investors naturally want to achieve an income objective while not being too dependent on one part of a portfolio. The good news is they now have more options, as both the UK equity market and UK government bond are offering yields of around 4% – and while rates are expected to fall later this year, UK equity income is on the up.
Income set to rise
A dominant theme from our meetings with UK fund managers has been around the material boost that share buybacks are giving to the total shareholder yield. This total shareholder yield takes account of both the dividend a company pays out, but also the shares it buys back. The UK market currently offers the highest total shareholder yield globally at 6.1% and through 2023, 40% of FTSE 100 companies bought back their own shares.
Dividends have been a key to the UK investment case for a long time. It’s a market that’s home to a lot of world-class companies, big and small, selling their goods and services around the globe with many boasting impressive records of growing dividends over the long term.
Share buy backs have been dominating the news flow, but they aren’t necessarily coming at the expense of dividends. Headline market dividends are forecast to rise 3.7% in 2024 to £94bn, though this is still lower than the £100bn figure pre-Covid. The combination of attractive dividends, material share buy backs and the discount the UK market continues to offer makes it an attractive time to invest.
Two UK Income fund ideas
Artemis Income
We think the Artemis Income team is one of the best in the business and is 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 large 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. At the time of writing, the fund yields 3.9%.
Schroder Income
The fund is managed by the experienced duo of Kevin Murphy and Andrew Evans. They also benefit from the support of the 12-strong value team who employ the same investment process across multiple regions. We have a positive view of the collegiate approach, capability and experience of this team.
This fund aims to provide long term income and capital growth by investing in a diversified portfolio of UK companies. It has a distinct value style bias and the contrarian approach employed means it can look quite different to the index at times. Stocks with attractive risk/reward ratios are purchased with positions sized according to the managers’ assessment of the risks involved, with the larger positions in those with lower risks. At the time of writing, the fund yields 5.02%.”
