HL SELECT UK INCOME SHARES

Choosing the right mix for dividend growth

Managers' thoughts

Important information - The value of this fund can still fall so you could get back less than you invested, especially over the short term. The information shown is not personal advice and the information about individual companies represents our view as managers of the fund. It is not a personal recommendation to invest in a particular company. If you are at all unsure of the suitability of an investment for your circumstances please contact us for personal advice. The HL Select Funds are managed by our sister company HL Fund Managers Ltd.

Steve Clayton - Fund Manager

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.

Dividend raised again

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.

How, and why, we’ve built the portfolio

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.

Technology drivers

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.

Strong track records

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.

Real estate companies with something different

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.

Assurance and insurance

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.

MORE ABOUT HL SELECT UK INCOME SHARES INCLUDING CHARGES

HL SELECT UK INCOME SHARES KEY INVESTOR INFORMATION

Important - This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research

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for more information. Unless otherwise stated performance figures are from Bloomberg and estimates, including prospective yields, are a consensus of analyst forecasts from Bloomberg. They are not a reliable indicator of future performance. Yields are variable and not guaranteed.