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Where are the income opportunities in the UK? – 2 fund ideas

The UK is home to a lot of world-class companies and is a leading market for income. But where are the opportunities?
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No recommendation - No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

The UK has long been a leading income market and dividends have been key to its investment case.

It’s a home to a lot of world-class companies, big and small, selling goods and services around the world. Many of them are boasting impressive records for growing dividends over the long term.

Here’s a closer look at how the UK stock market yield has compared to yields offered by government bonds (gilts). We’re also exploring a key theme from our meetings with UK fund managers, focusing on share buybacks and the impact they could have on returns.

This article isn’t personal advice. If you’re not sure an investment is right for you, ask for financial advice. Investments and any income from them can rise and fall in value, so you could get back less than you invest.

Remember, past performance including yields isn’t a guide to the future, and no dividend is ever guaranteed. You should also make sure any investments you own are held as part of a diversified portfolio.

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How have UK equity and bond yields changed over time?

Chart showing equity vs 10-year government bond yields performance

Past performance isn’t a guide to future returns.
Sources: United Kingdom Debt Management Office & MSCI, February 2024.
Government Bonds (Gilts):

Government bonds are a type of debt instrument where an investor lends money to the government. Most pay a fixed level of interest for the duration of the bond and repay the initial lump sum to the investor when the bond matures. UK government bonds are also known as gilts.

This chart shows that over most of the last 10 years, the equity market yield has been significantly higher than the yield offered by gilts. But right now, gilt yields are higher than they’ve been for years. So, gilts are offering a bigger return, assuming you hold them until they mature.

2022 was a painful year for fixed income markets with a lot of bond investors experiencing sizeable losses. Bond prices and bond yields are inversely related, when bond prices fall, yields rise. So, while investors might have felt some pain along the way to get here, the outlook is now much brighter.

For investors looking for income, the main challenge is how to get it without being too dependent on one part of a portfolio.

At the time of writing, with both the UK equity market and UK government bonds offering yields of around 4%, there are more options in the toolbox than before.

What are the impacts of share buybacks?

We regularly meet with fund managers investing in all corners of global markets as part of our investment research.

The dominant theme for fund managers investing in the UK has been around the material boost that share buybacks are giving to total shareholder yield. This total shareholder yield takes account of both the dividend a company pays out, and the shares it buys back. The UK market right now is offering the highest total shareholder yield globally at 6.1%.

Through 2023, nearly 40% of FTSE 100 companies bought back their own shares. If this continues, share buybacks on this scale are likely to have more than a small impact on shareholder returns.

What’s the outlook for UK dividends?

Share buybacks have been dominating the news, but they aren’t necessarily coming at the expense of dividends. Through 2023, dividends paid out by UK companies rose by 5.4% on an underlying basis, with the biggest contribution to this growth coming from the banking sector.

Looking ahead to the rest of 2024, headline market dividends are forecast to rise 3.7% for the full year to £93.9bn, though this is still lower than the £100bn pre-pandemic.

We think the combination of attractive and growing dividends, significant share buybacks, and the discount the UK market continues to trade on makes it an attractive time to invest.

2 UK income fund ideas

Investing in these funds isn’t right for everyone. Investors should only invest if the fund’s objectives are aligned with their own, and there’s a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio.

For more details on each fund and its risks, use the links to their factsheets and key investor information.

Artemis Income

We think the Artemis Income team are one of the best in the business and are well placed to make the most of UK income opportunities.

The experienced trio of Nick Shenton, Andy Marsh and industry stalwart Adrian Frost have over 80 years of investment experience between them and are mainly investing in large UK businesses.

The fund invests in companies they think can pay a sustainable income through the market cycle, whatever the economic backdrop. These tend to be businesses with lots of reoccurring revenues. This increases the chances they can retain and grow their customer base, profits, and dividends over time. Although this is never guaranteed.

Right now, the fund has a historical yield 3.90%.

The fund takes charges from capital, which can increase the yield but reduce the potential for capital growth.

Schroder Income

Schroder Income is managed by the experienced duo of Kevin Murphy and Andrew Evans. They also benefit from the support of the 12-strong value team who employ the same investment process across multiple regions. We’ve got a positive view of the collegiate approach, capability, and experience of this team.

The fund aims to provide long-term income and capital growth by investing in a diversified portfolio of UK companies. It has a distinct value-style bias and its contrarian approach means it can look different to the index at times.

They buy stocks with attractive risk/reward ratios in proportions in line with the managers’ assessment of the risks involved, with more invested in less risky areas. The fund is relatively concentrated though which increases risk.

At the time of writing, the fund has a historical yield of 5.02%.

The fund takes charges from capital, which can increase the yield but reduce the potential for capital growth.

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Written by
Joseph Hill
Joseph Hill
Senior Investment Analyst

Joseph is part of our Fund Research team. Having joined HL in 2017 initially on a graduate scheme, he's now integral to our analysts who select funds for our Wealth Shortlist. He also analyses the UK Growth, UK Equity Income and UK Smaller Companies fund sectors, providing expert insight for our clients.

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Article history
Published: 3rd April 2024