With the financial headlines filled with talk of trade wars, volatility and market corrections, one could infer that now is the time to be investing in bond and absolute return portfolios. However, all of these news headlines, combined with the uncertainty around Brexit, have resulted in the UK equity market looking very cheap compared to other markets1. Additionally, if you compare the UK equity market dividend yield with the yield on 10-year Gilts, the yield gap has not been wider since the 1920s!2
In this environment, the UK Equity Income sector deserves
serious consideration. The sector not only allows investors who prefer the
regular income to receive a healthy level of cash flow year in year out, but
also provides the opportunity for investors who require capital growth to
capitalise on the power of reinvested dividends.
Active management is crucial
When it comes to equity income, actively managed funds have a clear advantage. Only rigorous analysis can uncover those companies that can continue to maintain or grow their dividend through more difficult economic times, or identify companies that may perhaps be over extending themselves with their dividend payments and could therefore be subject to a significant fall in share price.
Income investing also doesn’t necessarily mean mega-cap, bond proxy, defensive-type stocks. The JPM UK Equity Income Fund, for example, is an unconstrained vehicle, which aims to provide capital growth alongside a dividend yield in excess of the FTSE All Share. The fund is actively managed and seeks out companies that have strong balance sheets and high free cash flow yields, among other things.
Typically, companies held in the fund will either be offering a high dividend yield because they have a more mature business model, or they will be reinvesting the free cash flow they generate back in to their business at attractive return rates in combination with growing the dividend over time in line with earnings growth.
It’s this attractive mix of companies that allows the fund to be overweight small and mid cap equities, yet still offer a forward yield of 5.2%, which is a 12% premium to the FTSE All Share!3
Katen recently took part in a Wired debate on mid-cap investing.
To watch the video please click here
1 based on an average of price to earnings, price to book and price to dividend.
2 Citi research as at 24 April 2019 (Datastream, Citi research)
3 J.P. Morgan Asset management as at 30 April 2019. The figures stated are dividend yields based on the dividend expectations of the underlying holdings within the fund. The dividend yield is an estimated projected figure based on the assumption that dividend rates per share remain the same over the coming year. They do not take into account any funds costs. Please note that the JPM UK Equity Income Fund currently charges to capital the fees of the ACD and operating expenses. Dividends are not guaranteed. Past performance and yield are not a reliable indicator of current and future results.
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