The hunt for yield leaves UK shores

A growing number of fund managers are casting their nets outside the UK to find high-yielding income stocks – as the pool of UK companies offering attractive dividend yields recedes further.

Companies in the UK now lag behind those of Japan, North America, much of Asia, Europe and many emerging markets in providing year-on-year growth in dividend yields, according to research released this week by Legg Mason, the fund manager.

Only one UK company appears in the rankings of the world’s top 100 yielding stocks – and only just. GKN, the engineering group with a dividend yield of 14.1 per cent, is ranked 97th.

There are 17 Taiwanese names on the list; nine each from Australia and Canada; six from the US; and five from Israel.

The most eye-catching are: Incitec Pivot, the Australian chemical manufacturer offering a yield of 89.8 per cent; International Nickel Indonesia at 68.1 per cent; and
Fortis, the Belgian financial services conglomerate which provides a 63.5 per cent

A decade ago, UK companies offered much higher dividend yields, on average, than companies elsewhere. As a result, equity income fund managers tended to allocate at least 50 per cent of their funds to high-yielding UK stocks. But in the past five years, this trend has reversed and global income funds are becoming more popular.

Invesco Perpetual is the latest UK fund house to introduce a global equity income fund, with a launch at the start of the month. For manager Paul Boyne, a bottom-up stockpicker, the advantage of running a global income fund is that it offers the chance to “cherry-pick” stocks in the wider market. Less than 20 per cent of the fund is in UK companies, and Asia holds as much appeal, he says. Holdings are spread across sectors, spanning pharmaceuticals and tobacco to European energy stocks.

Jeremy Tigue, manager of the Foreign & Colonial Investment Trust, the UK’s oldest investment trust, reports increasing success finding higher yields with adequate dividend cover in emerging markets, which he has been exploring since 2003.

“Our expectation back then was that we would suffer a big fall in income by pushing into emerging markets, but we didn’t,” he says. “And I think companies in emerging markets have stronger financial positions and better growth prospects than companies elsewhere.”

He hunts for companies offering dividends covered at least twice by earnings and his favoured picks include Microsoft, which has seen its shares fall by more than a third in the last year, Nokia and BP.

In the past six months, the returns from global equity income funds such as the ones run by Schroders (down 28.5 per cent) and Threadneedle (down 26 per cent) have been as poor as those provided by counterparts in the UK equity income sector. And Boyne and other managers are equally fearful that, as companies look to preserve capital, another round of dividend cuts across the wider market will depress returns. “The sustainability of dividends is the issue,” Boyne says.

But investing in a wider market offers greater diversification and global fund managers are not being forced to take as many precautions as managers of UK equity income funds. With the yield on the FTSE All Share index – which now stands at 5.6 per cent – projected to fall, more UK equity income fund managers are adopting defensive positions, and in some cases, holding bonds to compensate for a shortfall.

While the sharp fall in the pound has helped managers of UK funds denominated in sterling but receiving dividends in other currencies, the threat of further cuts
to UK payouts is now a worry.

The top 10 dividend payers in the FTSE 100, led by BP, Shell and Vodafone, account for 60 per cent of total expected dividend payouts for the entire UK market, according to Citigroup.

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