The highest-paying UK income funds

With dividend-paying companies holding up well during a difficult 2022 and distributions recovering after a lockdown slump, income investors hit something of a sweet spot in the past 12 months. The UK market in particular continues to offer high yields and exposure to more cyclical companies, which also fared better last year in terms of capital growth.

But trickier times may lie ahead. Investment platform AJ Bell’s Dividend Dashboard report on the first quarter of 2023 noted that aggregate FTSE 100 dividend forecasts for 2023 and 2024 had slipped “thanks to fears of recession, rising interest rates and weakness in metal (and now oil) prices”. And earlier this year Link Group warned that dividends could get leaner as mining majors’ profits fall back.

Income investors now have other options thanks to a spike in bond yields and high yields on offer from investment trusts focused on alternative assets, so have good reason to shop around. But many UK income funds have continued to make decent payouts in 2023, and parsing the data can show which ones still stand out.

The big payers

We have screened the Investment Association and Association of Investment Companies UK Equity Income sectors for the funds that have paid out the most so far in 2023, assuming you were invested since at least late 2022. Funds make payouts with different levels of frequency, meaning that those that distribute income often, for example once a month, may look better than some of their peers at given points. But funds with a variety of different distribution frequencies crop up in the results, and the names that appear can give some clues about what has worked.

The table below shows some of the biggest payers, which include a number of investment trusts. Shires Income (SHRS) has paid out the most so far in 2023, although its shares are down slightly over one year. A position worth nearly 8 per cent of Shires Income’s assets held in fellow Abrdn-managed trust Abrdn Smaller Companies Income Trust (ASCI) has detracted from its recent performance. Abrdn Smaller Companies Income Trust has struggled with limited scale and a persistent share price discount to net asset value (NAV), although this prompted the trust's board to announce a strategic review earlier this year that could produce a resolution.

Shires Income otherwise has notable exposure to sectors most associated with the FTSE 100, with nearly 40 per cent of its portfolio in financials at the end of March and 13.7 per cent in energy. However, the trust's investment team has focused on the risk that more cyclical holdings could suffer in the face of an economic slowdown. They commented in the trust’s annual report for the year to 31 March 2023: “In the mining sector we exited BHP (BHP) and continued to reduce the weighting to Rio Tinto (RIO), reflecting our view that a recovery in Chinese demand is now reflected in the share price.”

The investment team has invested the proceeds in Anglo American (AAL), while focusing on idiosyncratic cases such as Diversified Energy (DEC) noting that it “has been weak on lower US gas prices despite being well hedged".

Shires Income recently had an attractive dividend yield of around 5.4 per cent, although its shares were trading at a small premium to NAV. Other popular UK equity trusts such as City of London Investment Trust (CTY) continue to command small premiums.

By contrast, a number of UK equity income trusts have recently traded on big discounts to NAV. Multi-cap fund Diverse Income Trust's (DIVI) shares tumbled during the past year and it recently traded at a discount of nearly 7 per cent. And Lindsell Train-managed Finsbury Growth & Income Trust (FGT) recently traded on a discount of around 3.5 per cent despite very strong returns over the past 12 months.

Elsewhere, funds known for a value bias have generated good payouts. Take Schroder Income (GB00B5WJCB41) run by Nick Kirrage and Kevin Murphy, who are known for a deep value approach with funds such as Schroder Recovery (GB00B3VVG600). Schroder Income has a good spread of sector allocations, with financials, consumer discretionary and consumer staples its most prominent exposures. From supermarkets to banks and energy majors, a good mix of different stocks featured among the fund’s top holdings at the time.

Savvy calls

Three general points are worth noting: the extent to which income funds are exposed to more cyclical shares such as the energy majors, investment trusts' available revenue reserves for backing up dividends in lean years, and the extent to which funds look beyond the large-caps that dominate UK payouts.

But other factors can also have an impact, including the extent to which funds write options as a way of boosting their income. Our analysis of income payouts over a five-year period – UK income funds versus trusts – found that such funds’ payouts fared well, with the likes of Schroder Income Maximiser (GB00BDD2F083) and BNY Mellon Equity Income Booster (GB00B8HCF105) topping the tables.

You can see similar trends in 2023. Shires Income can boost its income by writing options, while funds with an explicit focus on options such as Fidelity Enhanced Income (GB00B87HPZ94) crop up in the table. Although such funds can miss out on gains in rising markets, they continue to impress with their level of income generation.