The 20 most-popular dividend shares among UK fund managers in 2023

We reveal the income-paying companies that UK fund managers are attracted to.  

For investors looking to generate income from their investments, a big trend for several years now has been to go global.

This makes a lot of sense since investing globally provides more diversification, as your money will be invested in more countries and sectors.

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However, there’s a trade-off, which is that global equity income funds typically have lower dividend yields than UK equity income funds. The former are yielding 3% to 4%, while the latter are providing yields of 4% to 5%.

There are several reasons why this is the case, but the main ones are that the UK is a high-yielding market with a rich dividend heritage. This allows professional investors to assemble a portfolio that is aiming to deliver a market-beating yield (FTSE 100 index is expected to yield 3.9% in 2023), and capital growth. 

In addition, global equity income funds tend to have the US as their top country position, with exposure typically ranging from half to two-thirds of the portfolio. The US market has a growth bias, which is reflected in US shares having lower dividend yields than here in the UK.

An important thing to bear in mind, though, is the highly concentrated nature of UK dividends. The biggest companies dominate, with the top 15 dividend payers accounting for 60% of all dividends in 2022.

Most fund managers position their portfolios to hold these income heavyweights in their top holdings, as shown in the latest Morningstar data, which details the 20 most-popular dividend paying shares among UK equity income funds. The data, to the end of January, ranks the shares by the sector average percentage weighting.

Of the 15 biggest dividend payers in the UK market in 2022, only three do not appear: Glencore (LSE:GLEN), Vodafone (LSE:VOD), and Diageo (LSE:DGE).

Of the 20 most-popular dividend shares, healthcare, energy and tobacco firms dominate the most-popular income stocks. These sectors are viewed as income staples, due to their stable earnings, which usually results in dependable dividends. This gives investors great comfort, particularly in times of economic uncertainty.

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For investors who would like greater exposure to mid- and small-cap companies paying dividends, this can be achieved through UK multi-cap income funds, and dedicated UK smaller company income funds.

How the top 20 has changed over the past six months

Compared to last summer, when the data was last compiled for interactive investor, there have been two changes in the top 20. Entering the table are NatWest (LSE:NWG) and Next (LSE:NXT), in place of Vodafone (LSE:VOD) and SSE (LSE:SSE).

In terms of notable positional changes, BP (LSE:BP.) has pipped AstraZeneca (LSE:AZN) to become the most-popular income stock among professionals, while Phoenix Group Holdings (LSE:PHNX) has jumped from 10th to fifth place, and Legal & General (LSE:LGEN) has slipped from seventh to 12th.  

Half the 20 most-popular income stocks have dividend yields of over 5%. The four highest, all yielding above 8%, are Phoenix Group (LSE:PHNX), Legal & General (LSE:LGEN), HSBC (LSE:HSBA), and British American Tobacco (LSE:BATS).

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With all higher yields, investors need to be careful that they are not taking too much jam today at the expense of jam tomorrow. Lower yields may offer higher dividend growth over the long term. 

In addition, as share prices and yields have an inverse relationship, a high yield is often a sign that a stock, for whatever reason, is out of favour. It is therefore crucial to do some digging to check whether the yield on offer is sustainable, including looking at its dividend cover.

As a rule of thumb, a low dividend cover ratio – around one times or lower – suggests dividends are vulnerable, as the company is using most, if not all, of its profits to fund the dividend. A figure of two or more is viewed as comfortable because it is a sign the business is not over-distributing.

Those firms that do hand back more cash than they can afford risk damaging their longer-term growth prospects through lack of investment in the business.

Most-popular global dividend shares among fund managers 

Data from Morningstar to end of January. Forecast yield figures sourced on SharePad on 14 March. Past performance is not a guide to future performance.