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Which equity income funds pay the best dividends?

One ongoing problem for investors in equity income funds is they are not routinely provided with what is critical information when deciding where to invest – the actual level of income the funds have paid out.

Fund performance is typically given on a total returns basis, combining income paid out and stock market growth, but if your reason for investing is to produce an income it can be very difficult to find the information to compare funds.

This is the third year that Money Marketing has published its equity income dividend report to highlight not only which funds have paid the most income but also show which funds have been able to pay out consistently high levels of income.

The total dividends paid by UK equity income funds are calculated from Lipper data and presented over rolling three-year periods.

The figures show the total amount of cash each income fund puts in an investor’s pocket over three years from a £1,000 investment. The data also shows how well each fund retains its capital value.

The fund with the most cash from an investor’s stash is the Insight Equity Income Booster fund which paid £255.48 over the three years ended 31 December. This was followed by Fidelity Enhanced Income, which paid £221.62, and Schroder Income Maximiser, which paid out £211.69.

Source: Lipper
Top UK equity income funds for income paid    
Fund Income paid Capital value
Insight Equity Income Booster Sterling Income 255.48 1031.68
Fidelity Enhanced Income 221.62 1110.67
Schroder Income Maximiser 211.69 1156.75
PFS Chelverton UK Equity Income 198.53 1418.03
Santander Enhanced Income Portfolio 195.71 1014.98
Figures are for dividends paid to investors over three years to 31/12/2013per £1,000 invested
Capital value is based on £1,000 invested over three years to 31/12/2013 after dividends paid out

Insight Equity Income Booster manager Tim Rees says he focuses on large-cap firms, avoiding the volatility of small and mid-cap stocks. Smaller companies have a more pronounced boom and bust cycle; while they are doing well now, they were not a few years ago, he says.

It also means the companies have a market for over-the-counter call options which are used to boost the fund’s income. The overlay is managed by Insight’s derivatives desk with an aim of adding an extra 4 per cent to the fund’s return annually.

“If you are trying to get a similar amount of income from a usual strategy you would have to invest twice as much to get the same physical pound return,” Rees adds.

Otherwise, managers have to invest in higher yielding stocks that have higher risk, he says.

But he concedes enhanced income funds will perform better in sideways and falling markets than growing markets.

It is not just Rees’s enhanced income fund that has produced high levels of income. Enhanced income funds take out three of the top five dividend payers.

Whitechurch Securities head of research Ben Willis says it is no surprise that derivative-enhanced funds dominate.

The covered calls written by enhanced income funds to boost dividend payments have to be carefully managed to squeeze out the most short-term cash without too many options passing the strike price and sacrificing growth.

“It is a bit of a gamble, what you do not want is to be called too many times,” Willis adds. “If you get a raging bull market, you would expect [enhanced income] to lag because it’s going to get called a lot on the stocks.”

For investors, the level of income paid out by the fund is as important as the sustainability of income. The table below shows a selection of some of the most popular funds in the sector ranked by quartile according to the level of income they pay out and illustrates their consistency. The full sector list is available online.

Only three funds have consistently been top quartile for dividend payments over the seven data periods covered: the JO Hambro Capital Management UK Equity Income, Newton Higher Income and  Santander Equity Income fund. Over the three years to 31 December 2013, Santander’s fund paid £163.19 in dividends, while growing capital comfortably more than inflation to £1,144.

The JOHCM fund paid out £159.25, with a whopping £334.55 of capital growth, while Newton paid £186.43 while growing capital slightly behind inflation to £1,086.

Two funds, PFS Chelverton UK Equity Income and Schroder Income Maximiser, have consistently been in the top quartile for income paid but do not have a track record over the whole period.

In the full list there are also several funds, including Allianz UK Equity Income, Artemis Income,  Smith and Williamson UK Equity Income, Threadneedle UK Equity Alpha and UK Equity Income and Unicorn UK Income which have been in the top or second quartile since 2007.

It is also important for investors to ensure income paying funds are protecting their capital.

Hargreaves Lansdown’s inflation calculator shows prices rose 10.3 per cent in that timeframe, so the investment would need to grow to £1,103 to retain its value.

Despite the healthy 25 per cent triennial return from Insight Equity Income Booster, the fund’s modest capital growth – the £1,000 rose to just £1,031 – meant a real value loss of about £70 in that time when inflation is taken into account. The same effect can also be seen with the Santander Enhanced Income fund which is also lagging inflation over the three years to end of December 2013.

UK equity income dividend returns – selected high profile funds                
  2007 2008 2009 2010 2011 2012 2013 Dividend to 2013
Fund name                
Allianz RCM UK equity income 1st 1st 1st 1st 1st 2nd 1st 158.5
Artemis income 1st 1st 2nd 2nd 2nd 2nd 1st 155.26
Aviva UK equity income 1st 1st 2nd 2nd 3rd 3rd 3rd 144.72
Axa Framlington UK equity income 3rd 3rd 4th 4th 2nd 3rd 4th 125.93
Blackrock UK income 4th 4th 3rd 3rd 3rd 3rd 3rd 140.29
Fidelity MoneyBuilder dividend 4th 3rd 1st 1st 1st 2nd 1st 160.97
Franklin UK equity income 2nd 2nd 2nd 2nd 3rd 2nd 2nd 145.93
HL: MM income and growth 4th 4th 4th 3rd 3rd 2nd 2nd 145.94
Invesco Perpetual high income 3rd 4th 3rd 4th 4th 3rd 3rd 137.09
Invesco Perpetual income 2nd 2nd 3rd 4th 4th 3rd 3rd 137.75
Invesco Perpetual UK Strategic Income 4th 4th 4th 4th 4th 4th 3rd 136.52
JOHCM UK equity income 1st 1st 1st 1st 1st 1st 1st 159.25
Jupiter income 3rd 4th 3rd 3rd 3rd 3rd 2nd 153.36
M&G dividend 1st 1st 1st 2nd 3rd 3rd 3rd 139.69
Neptune income 1st 2nd 2nd 2nd 2nd 2nd 3rd 142.22
Newton higher income 1st 1st 1st 1st 1st 1st 1st 186.43
Psigma income n/a n/a n/a 2nd 2nd 2nd 2nd 153
Rathbone income 2nd 3rd 3rd 2nd 2nd 2nd 2nd 146.25
Schroder income 2nd 2nd 1st 2nd 3rd 4th 4th 132
Schroder income maximiser n/a 1st 1st 1st 1st 1st 1st 211.69
Smith and Williamson UK equity income 1st 1st 1st 1st 1st 2nd 2nd 151.99
Standard Life UK equity high income 3rd 4th 3rd 4th 4th 4th 4th 129.25
Threadneedle UK equity income 2nd 1st 1st 2nd 1st 1st 2nd 146.53
Troy Trojan income 4th 1st 2nd 1st 3rd 2nd 2nd 152.34
Vanguard UK Equity Income n/a n/a n/a n/a n/a 1st 3rd 138.79
Souce: Lipper                
Analysis of Lipper data by Bruce Dalton                
Rank by quartile is based on total income paid over the three years to end of December 2013          
Dividend paid is based on total income paid in three years ending December 31, 2013, based on £1,000 invested        


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