Even as the UK equity market has fallen sharply from favour with investors in recent years, it was universally accepted that a merit of the FTSE 100 was the prevalence of dividend-paying stocks relative to the index.
But with the yield on the UK’s blue-chip presently 3.5 per cent, considerably below that offered by many developed market government bonds, is the UK as synonymous with income investing now as was historically the case?
At the same time, two of the factors that have historically helped to boost the yield of the UK market, sterling weakness and the preference of UK chief executives to pay dividends, rather than buy back shares, have started to reverse.
Short of a very deep recession, we can be confident the biggest dividend payers in the FTSE 100 will continue to be able to pay
One of the reasons UK equities have fallen from favour with many investors was the FTSE being seen as a market stuffed full of companies in sectors such as oil and gas, tobacco and pharmaceuticals, which are either not growing or will have their future growth disrupted by the sort of technology companies that have come to dominate the US market.
David Jane, multi-asset investor at Premier Miton, says the problem is the “themes” that dominate investors’ thoughts most of the time, such as artificial intelligence.
Blake Hutchins, manager of the Troy UK Equity Income fund, says the 3.5 per cent yield offered by the FTSE should be seen in the context of the US market offering 1.1 per cent and the MSCI World Index, which yields slightly more than 2 per cent.
With this in mind, he says: “The UK remains attractive for an income investor, when compared with other markets.”
That dichotomy between the need for income attainable from the UK market and the need for growth has been on the mind of Martin Connaghan, who jointly runs the Murray International investment trust. But, he says, “our trust is an income product, and we are focused on what the shareholders want”.
But chart one, below, shows that in total return terms, the IA UK Equity Income sector has actually outperformed both its global income peer group and the global market over the past five years.
So could it be a sector that is set for a reboot in terms of client demand?
America last?
Talib Sheikh, a multi-asset investor at Fidelity, says that based on the current economic and market conditions, he finds the best value is “income-paying stocks outside of the US”.
