Interactive Investor

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

19th December 2023 11:45

Kyle Caldwell from interactive investor

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 is invested in more countries and sectors.

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 yielding 4% to 5.5%.

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 aiming to deliver a market-beating yield (the 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.

Another plus point for the UK is that valuations are lower than historical averages, due to the UK having been out of favour among investors for several years. Alex Wright, fund manager of Fidelity Special Values (LSE:FSV), a member of interactive investor’s Super 60 list, says: “UK equities are currently pricing in extreme pessimism and, as a result, trade at a significant discount to other markets. While the outlook is uncertain and corporate earnings could disappoint in the near term, this is also true of other markets such as the US, where valuations are meaningfully more expensive."

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 income heavyweights in their top holdings, as demonstrated 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 October ranks the shares by the sector average percentage weighting. The forecast dividend yield figures were sourced from SharePad on 18 December 2023.

Of the 15 biggest dividend payers in the UK market in 2022, only five do not appear: Glencore (LSE:GLEN), Vodafone Group (LSE:VOD), Diageo (LSE:DGE), Aviva (LSE:AV.) and NatWest Group (LSE:NWG).

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.

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 since earlier this year

There have been two exits and two new entrants since the data was last compiled at the end of January. Aviva and NatWest Group have departed, while Lloyds Banking Group (LSE:LLOY) and Smiths Group (LSE:SMIN) have moved in.

Both Aviva and NatWest Group have high forecast dividend yields, of 7.7% and 7.6%, but are in the red for share price total returns over the past year, down 1.6% and 15.3%.

As our latest ii view explains, Aviva is facing into the headwind of the difficult economic backdrop for global markets, including heightened interest rates hindering flows into its Wealth business. In addition, it is suffering insurance claims payouts for both Canadian wildfires and UK and Irish storm damage.

In the case of NatWest, its Net Interest Margin (NIM), which is the difference between the interest income the bank receives from making loans and the interest they pay out on deposits, has been declining. This has also been the case for others in the sector. As pointed out by Richard Hunter, head of markets at interactive investor, this decline suggests that the benefits of higher interest rates have peaked as customers seek higher returns on their cash after years of virtually nil return.

However, Lloyds Banking Group shows that fund managers are still bullish on the UK banking sector. Those fund managers that have increased exposure to Lloyds could be set to benefit from a bigger-than-expected return of capital when the firm’s February annual results are released. Earlier this month, Lloyds confirmed that it had got back the entire £1.2 billion it lent to the Barclay family to finance ownership of the Telegraph and Spectator. Shore Capital analyst Gary Greenwood said this could mean a share buyback of £2.5 billion rather than £2 billion previously forecast. The developments may also lift pre-tax profits for the year by about 10%.

Engineer Smiths Group is the other new entrant. It supplies niche products to industries including oil and gas, chemical makers, life sciences, pulp & paper, and aircraft manufacturers.

Company Ranking at end of October 2023 Ranking at end of January 2023 Forecast dividend yield (%) A top 15 dividend payer for UK market in 2022? 
Shell (LSE:SHEL)134Yes
BP (LSE:BP.)214.8Yes
GSK (LSE:GSK)344.1Yes
HSBC Holdings (LSE:HSBA)4168.4Yes
AstraZeneca (LSE:AZN)522.3Yes
Legal & General (LSE:LGEN)6128.2No
Barclays (LSE:BARC)7105.9No
Imperial Brands (LSE:IMB) 968.6No
Unilever (LSE:ULVR)1094Yes
Lloyds Banking Group (LSE:LLOY)11Outside top 205.9No
Tesco (LSE:TSCO)12154No
Phoenix Group Holdings (LSE:PHNX)13510.2No
British American Tobacco (LSE:BATS)14810.3Yes
National Grid (LSE:NG.)15185.5Yes
Rio Tinto (LSE:RIO)16195.8Yes
3i Group Ord (LSE:III)17132.3No
Smiths Group (LSE:SMIN)18Outside top 202.6No
Anglo American (LSE:AAL)19144.4Yes
Next (LSE:NXT)20202.5No

Data from Morningstar to end of October 2023. Forecast yield figures sourced on SharePad on 18 March 2023. Past performance is not a guide to future performance.

Delve into the dividend

There’s plenty of high yields among the top 20, with British American Tobacco and Phoenix Group top of the pile, with yields of 10.3% and 10.2%.  

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, 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.

Check the track record for paying dividends

A company’s track record for paying dividends is worth considering as part of your wider research. Although a stock that has historically been a generous payer should not be considered a sure bet for dividends continuing to roll in, businesses which have patchy records should set alarm bells ringing.

However, bear in mind that a dividend track record does not show the fundamentals of a business, such as balance sheet strength and return on capital.

Moreover, to keep the dividend track record going, there’s the risk that some companies will keep on paying dividends for longer than is sustainable, such as through increasing their debt levels to fund income payments. 

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.