Frikkee defends fund’s dividend cut

Newton’s Tineke Frikkee has defended the planned 20-25% cut of her High Income fund’s dividend.

Frikkee defends fund's dividend cut

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The manager of the Newton High Income fund said the decision to rebase its dividend had not been taken lightly and was designed to take it to a more manageable level.

She also said the cut was a "one-off adjustment" and "the right thing to do".

Frikkee said the dividend yield on her fund had risen steadily over the last five years from 4.6% in the year to 31 August 2007 to 7.9% in the year to 31 August 2011.

The dividend for the fund is paid quarterly, and Frikkee predicted the next payment in November would be between 20-25% lower than the same payment a year ago.

"Company dividends are in a recovery stage at the moment and we forecast this year and next year to be good. But most people agree that we are in a lower growth environment and will be for many years to come. 

"So in the medium term dividend growth probably will start slowing compared to when growth was much stronger," Frikkee said.

She said when dividend growth slows in a few years time she wants her fund’s yield to be at a level that can keep growing.

Another reason for rebasing the fund’s dividend is to allow for the fund to invest in a wider selection of stocks.

Previously Frikkee would only invest in stocks that had a forward looking dividend yield of 15% or greater.

Now she thinks there are an increasing number of opportunities in stocks at the lower end of the spectrum.

Frikkee admitted that with hindsight Newton had possibly redistributed too much in previous years.

"We could have held back the growth, but that is what our portfolio delivered. We grew by what we thought was right."

To prevent the same issue occuring in the future Frikkee said the fund would be "micro-managed" and while it was likely dividend growth from the rebased level would be lower than the long-term historic level it would still be there.

"It may be that we are too cautious, but if we are that’s a bonus."

Industry opinion

Someone who thinks she could be too cautious is George Godber, fund manager at Matterley Asset Management.

He said: "Dividends are starting from a very, very low base. From a 30 year low and at a time when corporate financials are very, very strong."

All the FTSE 100 companies reporting in the last four weeks have shown minimum dividend growth of 15%, Godber added, with most growing by 20-25%.

Companies’ cash flow since the start of the year has been 30%, which Godber said shows they are not over distributing.

Fabien Degen, fund manager for dividend strategies at DWS investments, is also bullish on prospects for dividend yields.

"The biggest opportunity that we see for dividend investing in 2011 and beyond is the low interest rate environment as well as the long term favourable trend of increasing demand for income. 

"Typically a high percentage of companies with an above market dividend yield can be found in non-cyclical sectors such as consumer staples, telecoms, energy and utilities; we are more heavily weighted towards these secotrs.

"Non-cyclical sectors with growth prospects are less affected by the economic cycle and therefore have the ability to pay a sustainable dividend in the long run."

A good indication of the health of UK dividends can be found in Indxis’ UK Dividend Achievers Index, which was launched last year.

The index shows an annualised return over the year to July of 12.59% and is compiled from a list of the top 100 consistent dividend-paying companies.

These companies have increased their annual regular cash dividends over the past five or more consecutive years.

Back-tested data for the UK Dividend Achievers Index shows it would have outperformed its benchmark over three, five and ten years, with annualised returns of 2.59%, 3.29% and 7.59% respectively.

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