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Avoid dividend pitfalls with Aviva Investors UK Listed Equity Income

UK yields remain high but vulnerable
January 6, 2020

Divisive as it is among some investors, the UK equity market remains a rich source of yield. The FTSE 100 as a whole was expected to yield nearly 5 per cent over 2019 as of mid-October, according to AJ Bell. At the time, a quarter of the names in this index sat on yields of 6 per cent or higher.

IC TIP: Buy at 152.12p

However, some of these yields will be high for a reason. AJ Bell noted that dividend cover, or the extent to which a company’s profits cover its dividend payments, was worryingly low for some of those names offering higher yields. The dividend cut enacted earlier this year by Vodafone, one of the market’s bigger payers, highlights the fact that equity income investing in the UK is not without risks.

As such, investors should diversify their income across different sources, from using a variety of equity regions to venturing into other asset classes, from bonds to infrastructure. But they should also make sure to back a tried and tested UK equity income fund with a rigorous process.

One fund that has held up well, both in terms of income and returns, is Aviva Investors UK Listed Equity Income (GB0004460803). The fund tends to compare favourably both with other UK equity income funds and the FTSE All-Share over one, three, five and 10 years when it comes to total returns. The fund also offers an attractive income: its yield came to around 4.5 per cent at the end of October.

RSMR, a fund ratings agency, notes that the management team follows a set of investment principles. The fund targets a yield equating to at least 110 per cent of that available from the FTSE All-Share, for example, but the team also uses a “strong quantitative research process” to ensure that it backs companies with sustainable dividends. It also has a flexible, total return focus and can invest across different sectors and company sizes.

The fund’s managers, Chris Murphy and James Balfour, look to create a high-conviction portfolio of mature companies that benefit from a competitive position in their market and high barriers to entry, as well as having high dividend prospects. Environmental, social and governance (ESG) factors are integrated into the investment process and some investments are excluded based on policies at Aviva Investors, but the team has the final word on what goes into the fund.

A breakdown of the fund’s holdings by market capitalisation suggests it is well diversified to weather shifts in sentiment and future moves in the value of sterling. Around half of the fund’s assets were in giant or large-cap stocks at the end of October. It had a weighting of some 38 per cent in medium-sized companies, with around 12 per cent in small or microcap names. RSMR notes that the fund’s team has had “better stock selection” than most others in the UK equity income space when it comes to investing in bigger companies.

The fund can end up deviating from its underlying market significantly when it comes to sector exposures. It had 29.3 per cent of assets in financial services at the end of October, putting it 10.6 per cent ahead of the sector’s representation in the FTSE All-Share. The fund also has decent exposure to industrials, but lower allocations to energy, basic materials and healthcare than its underlying market.

Those considering this fund should be aware that, with a relatively high-conviction approach, it is not a low-risk option. It also operates in a market that remains vulnerable to big currency moves and changes in sentiment. But a rigorous process and the flexibility to move across the market could make this a safe pair of hands. Buy. DB