HL SELECT UK INCOME SHARES
Choosing the right mix for dividend growth
9 December 2019
Whether you’re investing for income, or long term growth, dividends are important.
Many investors want regular income, which is why the HL Select UK Income Shares fund pays dividends monthly, for income unit holders. But the compound effect of re-investing dividends is powerful, so investors can also choose accumulation units, where we automatically re-invest the income for them. Either way, we believe dividend growth is vital.
We believe successful income investing isn’t just about the next dividend. It’s about how high the income could be years down the line. A very high yield today can mean a lower total return in the long run, because the company isn’t reinvesting enough in future growth.
We want to provide investors with an attractive level of income today, but more importantly we aim to provide as much potential for long-term dividend growth as possible. So far we’ve been able to raise the regular dividend twice.
We aim to pay eleven “regular” dividends a year plus a “final” dividend of all of the income left over. The most recent regular payment in November was increased to 0.325p, taking the total dividends for the last twelve months to 4.03p. Although dividends are variable and not a reliable guide to future income.
Like any investment the HL Select UK Income Fund can rise and fall in value, so you could get back less than you invest. This blog post is not personal advice, if you’re unsure an investment is right for you, seek advice.
We want to hold businesses that are paying dividends into the fund for years to come, so their financial strength is vital. We are free to invest in large, medium or higher-risk smaller companies to find those that, we believe, have the most potential. And we aim to hold about 30 companies, so each can make a real impact on returns, though it also increases risk compared to a more diversified approach.
We have some holdings that offer high yields and some that offer next to none, but which we believe have the potential to grow in value. The aim is to build a portfolio that yields at least as much as the market, but with both dividend and capital growth potential.
Our largest company position currently is GB Group, a fast-growing company that provides ID and location verification software. These services are hugely in demand within the digital economy, enabling GB Group to generate double-digit organic growth which we believe can continue at high levels for some time to come. Another technology related business in the fund is Rightmove. The yield on these stocks may be low, but they have generated strong capital gains for the fund.
We have holdings in branded goods companies like Unilever and Diageo, and business information provider Relx all of which have long track records of paying rising dividends although they are not guaranteed to continue doing so. We’re invested in pharmaceuticals too; demand for medicine rarely falls for long, creating reliable cash flows to pay dividends.
We’ve only invested in real estate companies that have something different. Primary Health Properties owns a portfolio of doctors’ surgeries and health centres, where the rents are effectively guaranteed by the UK and Irish health services. Tritax Big Box owns a huge portfolio of those massive distribution assets that you find alongside major roads. The tenants are logistics companies, supermarket chains, leading retailers and e-commerce businesses like Amazon and they run the heart of their operations within them. The occupiers simply cannot trade without them, and demand for new distribution assets is strong. Both companies have generated reliable dividend growth and look well set for the future in our view.
Life Assurance can deliver long lasting cash flows as policies and premiums last for many years. So we hold businesses like Legal & General and Phoenix, which between them generate a little over a tenth of the fund’s income. We also own Sabre Insurance, a niche motor insurance company that generates high returns by sticking to a disciplined price strategy serving niches of the market and avoiding the more commoditised mainstream.
The key to the success of our strategy is to find that mix of high yielders and growth that will hopefully allow the overall dividend to rise in the longer term, although this is not guaranteed.
You can see the full portfolio of holdings on the portfolio breakdown page.