According to Capita Registrar’s most recent dividend monitor, Q2 of 2011 marked the biggest quarter for FTSE 250 companies since the third quarter of 2008.
Dividends from mid caps shot up 36% in the second quarter to reach £2.1bn, the first time they have topped £2bn since 2008. It was also twice as much as was distributed by such firms over the opening three months of the year, the report reads. Overall, in the first half of the year mid 250 shareholder payouts have risen 29%.
Despite the impressive growth, the figures are still a fraction of the total payouts for FTSE 100 companies, which continue to dominate the UK dividend picture. Of the UK’s dividends, the FTSE 100 accounted for almost 90%, Capita’s report suggests. However, the accelerating growth shows the healthy attitude of payouts that exists outside the largest UK companies.
Dividend concentration
It is a trend many equity income firms have been leaning towards, due in no small part to the heavy concentration of dividends in just a handful of companies.
It is this aspect of the UK’s dividend culture in recent years that has wrought much criticism on the attractiveness of equity income funds. Some feel their reliance on the same few stocks provides little diversification with most fishing from the same very small pond.
That situation has eased only slightly over recent quarters, Capita’s report shows. The top five firms pay out £11.2bn, the next 10 account for £9.6bn with the remainder of the entire UK market at £13.3bn.
This is why many equity income funds in fact have always featured small and mid cap companies. While they also provide yield, the faster capital growth prospects of such firms also provides a capital growth boost for portfolios.
Of late that trend is growing and now UK investors can access several dedicated small and mid cap equity income funds. Unsurprisingly, their performance has far outstripped some of their peers, who favour the larger end of the market.
UK equity income
Over the three years to the end of the second quarter, the top performing equity income fund in the IMA’s sector is Unicorn UK income, a small cap portfolio. On a bid-to-bid, total return basis the fund has returned more than 80% over the 36-month period. The next best performer, JOHCM UK Equity Income, returned 55.09%. Over the longer five year and shorter one year periods, Unicorn’s portfolio is still tops, FE data shows.
Besides the Unicorn fund there are a few other small to mid cap dedicated income portfolios and those that have a significant bias to invest outside the FTSE 100. These include funds like: Chelverton (ranked 8th over three years to 30 June), and SLI UK Equity Income Unconstrained (ranked 31/83). As of 30 June, the latter portfolio had 37.8% in the FTSE 250 and a further 11.2% in small caps.
Despite the lack of dedicated portfolios to this area of the market, many of the more traditional funds also dip outside the largest 100. This includes even the largest portfolios in the market despite the criticism that their unwieldy sizes make it difficult to gain small cap exposure.
Neil Woodford’s £8.6bn Invesco Perpetual Income fund has over 15% in companies below £1bn in size while his £11bn High Income portfolio has just under that amount (including warrants). Adrian Frost’s £3.9bn Artemis Income fund also has around 15% outside the FTSE 100, according to its June factsheet.
Aside from these examples, it is difficult to truly assess who has the most exposure outside the top 100 companies as few firms include a market cap break down in their factsheets.
