Despite the steep headline fall in the total dividends paid by UK in the first quarter of 2013, UK equity income funds still have the potential to offer good returns, argues Rob Burdett, co-head of multi-manager at F&C Investments.
Capita's most recent Dividend Monitor Report found that over the first quarter of this year dividends totalled £14.1bn, compared with £18.8bn during the same period in 2012. But Capita adds that the figures are distorted by one-offs last year.
"Investors would do well to consider smaller, nimble funds in the UK as well as the significant specialist dividend opportunities and those outside the UK as part of a diversified portfolio of income generating assets," said Mr Burdett. "The average UK equity income fund is currently yielding around 3.7 per cent and a number of fund managers we have spoken to expect net dividends to increase in their portfolios. There are a number of hidden gems which provide investors with decent returns and yet remain small in size. We like and continue to hold PFS Chelverton UK Equity Income (GB00B1Y9J463), which focuses on smaller and mid-cap income opportunities, as it has been a tremendous performer over the past four years.
"One of the most interesting numbers in the report is the increase in dividends by cyclical companies. We believe this is further proof that confidence is returning to the corporate world more broadly, and it bodes well for future total UK dividend payments."
But UK investors should not just look to their home market for dividends.
"Outside of the UK, we are seeing a raft of opportunities in the income arena," said Mr Burdett. "There are higher, faster growing dividend yields available in Asia and the emerging markets, while in Japan we are seeing dividend payments increasing at a faster rate still."
Asian income fund options include IC Top 100 funds Aberdeen Asian Income (AAIF) and Newton Asian Income (GB00B0MY6Z69), while Jupiter Japan Income (GB00B0HZR397) is a good option to access dividends in this market.
Read our tip on Jupiter Japan Income
See where to get global income in our interview with Stuart Rhodes
Income funds
| Fund | Yield (%) | 1 year cumulative return (%)* | 3 year cumulative return (%)* | 5 year cumulative return (%)* | Total expense ratio (%) |
| PFS Chelverton UK Equity Income | 5.33 | 31.6 | 58.5 | 58.8 | 1.8 |
| Newton Asian Income | 4.57 | 23.7 | 43.9 | 68.6 | 1.65 |
| Jupiter Japan Income | 2.48 | 25 | 18.2 | 37 | 1.75 |
| Investment trust | Yield (%) | 1 year cumulative share price return (%)** | 3 year cumulative share price return (%)** | 5 year cumulative share price return (%)** | Ongoing charge (%) |
| Aberdeen Asian Income | 3.25 | 34 | 78 | 150 | 1.29 |
Source: Morningstar, *Trustnet, ** Winterflood
