The latest UK Dividend Monitor report from Computershare paints a somewhat underwhelming picture for income investors. It notes that the FTSE 100 is likely to deliver a yield of 3.8 per cent in 2025, something that compares poorly with 4.6 per cent from a 10-year UK government bond or a rate of nearly 4.9 per cent on a cash savings account, and that the dividend outlook is “muted” this year.
While bonds and cash look competitive in terms of what they pay you, UK income investing still makes sense as a way of not just getting dividends but also a decent total return and a payout that grows over time. But from a funds perspective, the way you tap into this can take a variety of forms and make a big difference to overall returns.
Investors who want to take a passive approach have plenty of good options, but even here not all are alike. A FTSE 100 exchange traded fund (ETF) comes with a trailing 12-month yield of about 3.6 per cent and gives you exposure to a market heavy with the likes of financials and consumer staples companies. But investors can opt to focus even more closely on dividends: the iShares UK Dividend ETF (IUKD) comes with a trailing yield of 5.7 per cent, for one. It achieves this partly by having a much chunkier allocation to financials, which account for nearly 36 per cent of the portfolio, compared with 23 per cent of a FTSE 100 tracker.
The caveat is that IUKD has returned around 15 per cent over three years, trailing the 27.2 per cent return from a FTSE 100 ETF. Some investors, however, might be ok with lower total returns if they can generate a chunky level of income.
Those with a more risk-averse approach might take an interest in the SPDR S&P UK Dividend Aristocrats ETF (UKDV), which can only hold companies that have had rising or stable dividends for at least seven years in a row. This in theory gives the fund a more defensive profile but also means a lower yield, at 3.9 per cent at the last count. The fund’s total returns are roughly in line with those of IUKD over a one and three-year period, suggesting it may well work for those who favour a more slow and steady approach.
We should also be wary of conventional wisdom when it comes to active UK equity funds, including assumptions about how an income portfolio might differ from a more growth-minded rival. UK growth funds, for example, can still end up throwing off a decent level of yield at times, given the market in which they invest. If we look at some of the value funds that have done especially well in recent times, Artemis UK Select (GB00B2PLJG05) comes with a trailing yield of 2 per cent, while Invesco UK Opportunities (GB00B1W7HM62) is on 2.7 per cent.
Growth funds are also not guaranteed to give you a better total return. The average fund in the Investment Association’s UK All Companies sector has made 20.9 per cent over a five-year period, slightly trailing the 25.5 per cent for the IA UK Equity Income group. This trend will have something to do with the fact that UK value plays have done so well, and that a dividend-minded approach can lead managers to take more of a value approach. That’s just one of the many nuances to consider when picking a UK income fund.
