The 20 most-popular dividend shares among UK fund managers

We reveal the income-paying companies that UK fund managers are attracted to.  

For investors looking to generate income from their investments, a big trend for several years now has been to go global.

This makes a lot of sense since investing globally provides more diversification, as your money is invested across more countries and sectors.

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However, there’s a trade-off, which is that global equity income funds typically have lower dividend yields than UK equity income funds. The former are yielding 3% to 4%, while the latter are yielding 4% to 5.5%.

There are several reasons why this is the case, but the main ones are that the UK is a high-yielding market with a rich dividend heritage. This allows professional investors to assemble a portfolio aiming to deliver a market-beating yield (the FTSE 100 index is expected to yield 4.0% in 2024), and capital growth.

In addition, global equity income funds tend to have the US as their top country position, with exposure typically ranging from half to two-thirds of the portfolio. The US market has a growth bias, which is reflected in US shares having lower dividend yields than in the UK.

Another plus point for the UK is that valuations are lower than historical averages. This is because the UK has been out of favour among investors for several years.

An important thing to bear in mind, though, is the highly concentrated nature of UK dividends. The biggest companies dominate, with the top 15 dividend payers expected to account for 66% of all income payouts in 2024, according to Computershare.

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Most fund managers position their portfolios to hold income heavyweights in their top holdings, as demonstrated in the latest Morningstar data, which details the 20 most-popular dividend-paying shares among UK equity income funds. The data, to the end of June, ranks the shares by the sector average percentage weighting. The forecast dividend yield figures were sourced from SharePad on 27 August 2024. 

Of the 20 most-popular dividend shares, healthcare, energy, and tobacco firms dominate. These sectors are viewed as income staples, due to their stable earnings, which usually results in dependable dividends. This gives investors great comfort, particularly in times of economic uncertainty.

For investors who would like greater exposure to mid- and small-cap companies paying dividends, this can be achieved through UK multi-cap income funds, and dedicated UK smaller company income funds.

How the top 20 has changed since earlier this year

While there hasn’t been any changes in terms of exits or newcomers, an interesting trend is that fund managers have been increasing exposure to banks, reflected by Barclays (LSE:BARC) and Lloyds Banking Group (LSE:LLOY) climbing up the rankings. HSBC (LSE:HSBA) has slipped one place but remains popular in fifth place.

Several UK fund managers have been talking up banks lately, including Job Curtis, manager of investment trust City of London (LSE:CTY). In a recent interview with interactive investor, Curtis said his exposure to banks is the highest it has been in over 20 years.

Curtis’ favoured stocks in the sector are Lloyds and Barclays. He said: “Our biggest area now in the fund is financials, so that's banks, insurers, and financial services. We think there's a lot of value in some of these UK stocks in that area, and we're now actually overweight. We've got a bit more in the banks than the market average for the first time in over 20 years. That's a signal of our confidence.

“This is an area where we think the valuations of the UK banks are still quite cheap relative to what you can find overseas, and yet they're coming out with very good profitability.”

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Another fund manager who is bullish on banks is Nick Shenton, co-manager of Artemis Income. In a recent video interview with interactive investor, he said that it “makes no sense” that bank share prices are not higher than their current levels. He owns Lloyds, NatWest Group (LSE:NWG) and Barclays.

Shenton said: “Banks had 10, 12 years of paying fines and building capital after the financial crisis - that's largely done - and now they have strong capital positions. They're very well regulated. We think they're very well run, and they have surplus capital. The shares have been so cheap that they've been able to buy back large chunks of their stock, and that leads to increased value per share.

“We think the really strange thing is that the share prices hadn't been reflecting that. We were almost scratching our heads wondering why share prices were not going up more. Because when the share count goes down, the share price needs to go up. Otherwise, the value of the business is falling, which makes no sense. So, banks, we think, are well placed and they are quite key for dividends and dividend growth looking forward.”

• Why UK bank share prices should be higher

Delve into the dividend

There’s plenty of high yields among the top 20. With all higher yields, investors need to be careful that they are not taking too much jam today at the expense of jam tomorrow. Lower yields may offer higher dividend growth over the long term.

In addition, as share prices and yields have an inverse relationship, a high yield is often a sign that a stock, for whatever reason, is out of favour. It is therefore crucial to do some digging to check whether the yield on offer is sustainable, including looking at its dividend cover.

As a rule of thumb, a low dividend cover ratio – around one times or lower – suggests dividends are vulnerable, as the company is using most, if not all, its profits to fund the dividend. A figure of two or more is viewed as comfortable because it is a sign the business is not over-distributing.

Those firms that do hand back more cash than they can afford risk damaging their longer-term growth prospects through lack of investment in the business.

Check the track record for paying dividends

A company’s track record for paying dividends is worth considering as part of an investor’s wider research. Although a stock that has historically been a generous payer should not be considered a sure bet for dividends continuing to roll in, businesses which have patchy records should set alarm bells ringing.

However, bear in mind that a dividend track record does not show the fundamentals of a business, such as balance sheet strength and return on capital.

Moreover, to keep the dividend track record going, there’s the risk that some companies will keep on paying dividends for longer than is sustainable, such as through increasing their debt levels to fund income payments.

Data from Morningstar to end of June 2024. Forecast yield figures sourced on SharePad on 27 August 2024. Past performance is not a guide to future performance.