Naturally, all the big UK income funds plunder the FTSE 100. It's home to the biggest companies and some of the most generous dividend payers around.
In 2011, companies listed in the blue chip index paid out £68bn in dividends to shareholders. In 2012 it should be around £79bn, according to Capita Registrars, rising to £81bn in 2013. It is worth noting, too, that just 15 FTSE 100 companies pay out over two thirds of all the money received by shareholders from UK-listed companies. However, you won't find any young dynamic growth companies among them - they pump all their spare cash back into the business. Think more defensive heavyweights like Vodafone, Royal Dutch Shell, HSBC, BP, National Grid and GlaxoSmithKline.
These are the classic equity income plays; businesses in defensive industries such as utilities, tobacco, pharmaceuticals, insurance and telecommunications, where earnings are more predictable, even during an economic crisis. That tends to guarantee a steady stream of dividend income and a gradual increase in profits should deliver higher payouts over time, too.
Indeed, British American Tobacco, for example, yields four per cent and has increased its payout by 17 per cent for the past five years. There's even an index in the US - the S&P 500 Dividend Aristocrats - formed solely from large blue chip companies that have increased dividends every year for at least 25 years in a row.
Diversification
Diversification is one of the classic rules of investment and one worth following when building an income portfolio. By diversification, we mean spreading risk across sectors – utilities may be reliable, but dividend growth is likely to be greater elsewhere – and geographies, too – the UK has an established commitment to shareholder payouts, but there are also plenty of opportunities overseas.
Sectoral
First, let's look at sectors. True, defensive industries provide greater safety, but there's been a sea change in attitudes to dividends across the technology sector over the past few years, and more are returning cash to shareholders.
IT software firm Sage is one of the more generous - the shares trade on a prospective yield of 3.6 per cent. However, there's been a renaissance in IT on the other side of the Atlantic where the availability of credit is being used to produce future growth.
Apple has paid its first dividend since 1995 - it was sitting on over $100bn of cash, so it could afford to. So can others. Dell's decision to join the dividend list will undoubtedly attract income investors and push up the share price, generating capital growth as well. Other like Intel will also benefit. The chip giant has grown its payout by 10 per cent a year for the past five years, and on around 10 times forward earnings, the shares are not expensive, either. Microsoft, Cisco and Texas Instruments have increased payouts, too, and will see their shareholder base widen.
"It may still have a higher beta than other dividend issues, but (the IT sector) is a player, and the dividends need to be incorporated into the total return risk-reward formula," says Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.
