Is the UK still the top dog for income investors?

Sam Benstead examines whether income investors should look overseas instead of the UK, and names the highest yielding UK and global income funds. 

The UK stock market is known as an income powerhouse, especially the FTSE 100, which is packed with big cash generators, such as the mining, oil and insurance sectors.

The blue-chip index yields about 4%, which is one of the leading rates for a major developed market. However, international shares – which have been punished more heavily by investors this year – are beginning to catch up to the UK’s high yield.

The dividend yield on a stock is calculated by taking the past 12 months of dividends per share divided by the share price. Therefore, a lower share price or an increase in dividends drive up the yield.

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After falling about 25% this year compared with a 10% drop for the FTSE 100, global shares now yield about 1.5%.

A high-yielding basket of global shares, which can be tracked with the Super 60-rated Vanguard FTSE All-World High Dividend ETF, now yields more than 4%. The average global equity income fund yields 3.3%, according to FE FundInfo, a similar level to the average global equity income investment trust.

The highest yielding funds are: UBS Global Enhanced Equity Income Sustainable (11%); abrdn Global Dynamic Dividend (7.1%); and Premier Miton Global Sustainable Optimum Income (6.6%).

These funds are “enhanced income” strategies, meaning they use financial contracts known as derivatives to trade future capital gains for income. In rising stock markets, the funds’ value will lag the market, however.

Without using enhanced income, the highest yielding open-ended funds are: abrdn World Income Equity (4.5%); Artemis Global Income (4.4%) and Schroder Global Equity Income (4.1%).

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The highest yielding global equity income investment trusts are: Majedie Investments (7.2%); Murray International (4.8%) and Henderson International Income Trust (4.7%).

In contrast, the average UK All Companies fund and UK Equity Income fund yield 2.5% and 4.8% respectively.

Global dividends backed by rising profits

So, should income seekers look abroad for dividends? Janus Henderson, the fund group, calculates that global dividends face the coming economic downturn better supported by profits and corporate cash flow than at any time since 2011.

Ben Lofthouse, manager of Henderson International Income (LSE:HINT) Trust, said: “Global net profits leapt 78% in 2021 to £2.85 trillion, while cash flow, which is core to a company’s ability to pay dividends, rebounded by a third. Eight companies in 10 saw profits increase.

“In 2022, profits will rise again. The US earnings season has consistently surprised on the upside. Meanwhile, around the world, energy companies and banks are among sectors reporting booming results.

“On the negative side, many mining companies have now started to see profits decline, reflecting lower commodity prices, and there are more profit warnings appearing in sectors sensitive to the consumer. Our analysis of consensus forecasts puts global profits at £3 trillion this year, up 6.4% on 2021.”

Janus Henderson numbers show that dividends have recovered too, up 21.7% in 2021 to £1 trillion. In the first half of 2022, global payouts jumped a further 19.1% in sterling terms.

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Emerging markets saw the fastest growth, driven by oil companies, while dividends in Europe rose strongly on the back of restored banking payouts and booming profits from consumer discretionary companies such as car makers.

UK dividends also continued their recovery, although at a slightly slower pace than the wider world, the fund group noted.

Nevertheless, Janus Henderson adds that the second half of 2022 will no longer benefit from the easy comparison to the first half of 2021, when dividends in some sectors and some parts of the world were still affected by the pandemic.

This means dividend growth is set to be slower than the first few months of the year, however for the whole of 2022 it expects global dividend growth of 13% to a new record of £1.25 trillion.

Lofthouse says: “Taking an international perspective that diversifies across different geographies and different sectors is a powerful means of delivering long-term investment returns.”

His top 10 stocks in his trust, which yields 4.7%, include Microsoft, which yields about 1%, Coca-Cola, on a 3% yield, and French insurer AXA, on a 6.5% yield.

Income today versus income tomorrow

Neil Denman, manager of the Sarasin Global Higher Dividend fund, makes the point that while the FTSE 100 index is full of global companies, “they are not the world’s best companies”.

Denman adds: “Therefore restricting the income search to UK market can be an error and it is illogical to just invest in British companies for income.”

On top of that, he notes that lots of the UK’s biggest income payers – banks, mining and oil companies – have cyclical profits, meaning that they rise and fall with the economic cycle and dividends may be unreliable. “The market is cheap but is lower quality,” he says.

Denman currently likes industrial companies, such as Siemens, Broadcom and Cisco, and has also been adding shares in LVMH and Accenture. In the UK, he likes consumer goods companies Unilever and Reckitt Benckiser.

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Denman also warned that British companies that pay large dividends may become a target for the taxman, given that companies do not pay a “withholding tax” on dividends they pay, but the standard rate internationally is around 15%.

“This means there could be a tax rise to come in the UK for dividends. Yields in the UK could therefore fall if there was a move to global tax standards,” he said.

But investors do not need to look internationally to find high-quality income stocks, according to Ben Peters, manager of the Evenlode Global and UK income funds.

While he admits that the UK stock market is more cyclical than international shares, investors do not have to invest in that part of the market.

Peters said: “The UK does have high-quality multinationals, as well as companies that can cope with a broad range of macro factors. Shares there are also cheaper.”

TB Evenlode Income fund’s top holdings include accountancy software firm Sage Group, Unilever and Diageo.

Peters adds: “There is not much of a trade-off when investing just in the UK or globally. The main difference is that global shares have more technology and healthcare stocks, so you potentially get more yield in the future investing globally but more income today investing in the UK.”