The most-popular dividend shares among UK fund managers

Professional investors have been targeting FTSE 100 shares with high yields. 

Two years after scores of UK companies took an axe to their dividends, or put payouts on ice, dividends are back.

Having put income on the back-burner to shore up their balance sheets, the arrival of viable Covid vaccines and the re-opening of society has given companies greater confidence to resume paying dividends.

Some companies have become more generous, reflected in the second quarter of 2022 being the second-largest for dividend payouts of all time – just shy of the record achieved in the second quarter of 2019.

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Investors have been taking note, with recent research by interactive investor finding increased demand for dividend-focused funds and investment trusts.

As well as moving to take advantage of the return of dividends, the volatile market backdrop coupled with high levels of inflation has strengthened the appeal of income strategies. While far from guaranteed, the prospect of a company paying a dividend gives investors greater confidence in terms of its valuation versus firms that are reinvesting cash back into businesses for future growth.

With income in vogue, we’ve looked under the bonnet, via Morningstar, to find out what the most popular dividend-paying shares are among fund managers. In this article, the focus is on UK equity income funds, and we will cover global equity income funds later this month.

The data, from Morningstar to the end of June, highlights the 20 most-popular shares ranked by the sector average percentage weighting for UK equity income funds.

Such funds tend to have a bias towards the UK’s biggest companies, which are in the FTSE 100 index, and regarded as among the best hunting grounds for investors seeking income.

While dividends can be found for medium-sized firms and smaller companies, some up-and-coming firms tend to retain their earnings to invest in their business either organically, through acquisitions, or both. In contrast, the behemoths in the FTSE 100 have less room to grow, and therefore greater capacity to pay dividends.

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Figures from Link show how influential the biggest income payers in the FTSE 100 are in the overall dividend picture of the UK market. The 15 biggest payers in 2021 accounted for 59% of all dividends paid by the market, so £55.9 billion of £94.1 billion.

Therefore, it is no surprise to see 11 of those 15 firms in the list of the 20 most-popular UK income stocks among fund managers.

Of the four that do not appear, BHP Group de-listed from the UK market earlier this year and the other three are Diageo (LSE:DGE), Pennon (LSE:PNN) and Glencore (LSE:GLEN).

Healthcare, energy and tobacco firms dominate the most-popular income stocks among UK equity income funds. 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.

Another defensive sector fund managers like to invest in for income is utilities and both National Grid (LSE:NG.) and SSE (LSE:SSE) make the top 20 stocks.

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Financial services is another popular sector, with Legal & General (LSE:LGEN), Barclays (LSE:BARC), Aviva (LSE:AV.), 3i (LSE:III) and HSBC Holdings (LSE:HSBA) all featuring.

Most of the 20 stocks are yielding above the FTSE 100’s dividend yield of around 3.7%. Miner Rio Tinto (LSE:RIO) leads the pack, with a forecast dividend yield (based on analyst expectations over the next year) of 10%. Phoenix Group Holdings (LSE:PHNX) and British American Tobacco (LSE:BATS) are the next biggest yielders, at 7.6% and 7.1%.

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. 

Most-popular UK dividend shares among fund managers 

Data from Morningstar and to end of June. Yield figures sourced from SharePad.