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Backing small and mid caps for income

Fraser Mackersie and Simon Moon tell Dave Baxter why every company should be growing earnings as well as having a dividend yield
Backing small and mid caps for income
  • Unicorn UK Income is more focused on small and mid sized companies than many UK equity income funds
  • It may be less vulnerable to dividend cuts
  • But its managers' focus on quality companies means it can lag in market rallies

The outlook for equity income may slowly be improving, but 2020 remains a year that many dividend hunters would rather forget. Payouts in the UK dropped by a stunning 44 per cent on a headline basis last year according to Link Group, with the pandemic effectively washing away eight years of dividend growth. If anything, it reminds us not to rely solely on the highest-yielding markets for income.

Equity income fund managers have had their own lessons to learn. While investment trusts can dip into revenue reserves to maintain a dividend in tough times, open-ended funds have no such protection. What’s worse, most managers rely on a handful of large-cap stocks that provide much of the market’s income, leaving them vulnerable to cuts, suspensions and cancellations such as those that occurred last year.

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