Over the past few years, there has been a new development as these funds look to further boost income. This is the use of maximiser funds, which use derivatives written on the underlying holdings. For example, a fund may write call options on its holdings. It receives the premiums, and while the stock falls or remains below the strike price, there will be no effect apart from the additional income received by the fund.
If a stock reaches and exceeds its strike price, it will be sold at the strike price to the holder of the call option. Derivatives need to be carefully managed, but they do add value to the fund in return for giving up potential return above a specified level.
Clearly this strategy could detract from the fund’s potential value in a market that’s rising strongly, but it does introduce a level of stability, as the income from derivatives can offset any portfolio losses.
Investors should ensure that they investigate whether maximiser funds are being used in their holdings and if the fund manager is applying a limit on their use within the fund.
It seems that the popularity of UK equity income funds shows little sign of subsiding. However, many investors forget that the sector is not actually that large. In a universe of close to 3,300 unique funds, the UK equity income sector only contains 93.
Nicola Robinson is corporate manager at Parmenion
UK DIVIDEND-PAYING STOCKS
TOP FIVE
The UK equity market is extremely concentrated in terms of dividend payers. Here are the top-five UK dividend paying stocks in Q1 2014, according to the Capita UK Dividend Monitor.
Vodafone Group
Vodafone was the top dividend payer in the UK in Q1 2014 with its special dividend of £14.3bn net, accounting for approximately half of the quarterly total of £30.7bn. It is one of the world’s largest telecommunications companies with more than 411 million customers across roughly 30 countries. The announcement in September of the sale of its US group, including its 45 per cent stake in Verizon Wireless, for $130bn (£77.6bn) has helped drive the recent strong dividend performance.
Royal Dutch Shell
Royal Dutch Shell is a global group of energy and petrochemical companies. It operates in more than 70 countries, with roughly 92,000 employees. The company’s policy is to grow the US dollar dividend in line with “our view of the underlying earnings and cashflow of Shell”.
AstraZeneca
The British pharmaceutical business that recently rebuffed takeover attempts by US competitor Pfizer is a pure-play biopharmaceutical company with a primary focus on three areas of healthcare: Cardiovascular and Metabolic disease; Oncology; and Respiratory, Inflammation and Autoimmunity (RIA). It works in more than 100 countries and employs approximately 51,500 people worldwide. In 2012 it recorded total sales of $25.7bn.
