Interactive Investor

Five income stalwarts fund managers have been selling

17th August 2020 10:30

Hannah Smith from interactive investor

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We reveal the FTSE 100 income stocks dividend-hunters have been buying and selling.

Fund managers have been ditching former dividend darlings as companies take an axe to their payouts across the marketplace. 

A total of 445 companies listed on the London Stock Exchange have either cancelled, cut or suspended dividend payments between 1 January and 24 July, according to research from ETF fund manager GraniteShares. Of these, 50 were FTSE 100 companies and 108 housed in the FTSE 250 index. The second quarter’s 57% dividend decline was by far the biggest ever recorded, according to Link Group’s Dividend Monitor. 

BP cuts dividend for first time in a decade

BP (LSE:BP.) was the most-sold stock in the second quarter from UK equity income fund managers, according to data from FE Analytics. At the start of the year, the number of funds in the sector that held BP as a top 10 holding stood at 55%, but by the end of June this had fallen to 35% as fund managers moved to reduce exposure ahead of its dividend cut in early August. BP halved its dividend payout, its first cut it 10 years, as it suffered major losses as a result of Covid-19 turmoil. 

Chris McVey, manager of FP Octopus UK Multi Cap Income fund, said BP’s announcement was a huge blow for investors. “After the raft of dividend cuts in recent months, it will feel like another big knock for investors who once relied on ‘dividend stalwarts’ like BP for income.
 
“We know from our own analysis that many UK equity income fund managers had already reduced their positions in BP, likely in anticipation of this news. Yet it remained the third most-popular income stock across the sector and was a top 10 holding in 43% of income funds.

“Once again, this highlights the significant concentration risk for UK income investors and should demonstrate the need to look more closely at the underlying holdings when choosing a fund.”

Fellow oil major Royal Dutch Shell (LSE:RDSB) was also heavily sold after it cut its dividend by two-thirds for the first time since the Second World War. Managers also ditched three banks: Lloyds Banking Group (LSE:LLOY), HSBC (LSE:HSBA) and Barclays (LSE:BARC). The regulator has asked the big banks to suspend their dividend payouts to preserve their capital buffers so they can absorb Covid-19 shocks and keep lending to consumers and small businesses. 

Stocks dividend-hunters are buying

Looking at which stocks were bought up in UK equity income funds, miner Rio Tinto (LSE:RIO) was among the most popular, making up the top 10 positions in 37% of UK equity income funds compared to 27% six months ago. Last month, it increased its dividend by 3% in a show of strength, despite a 20% fall in net profits. British American Tobacco (LSE:BATS) has also become a top 10 position in many more portfolios. It still has an attractive 8% dividend yield, yet its shares have taken a knock as smoking rates decline and the group pins its hopes on vaping for future revenues.

Other stocks that managers are buying include miner Anglo American (LSE:AAL) even though it halved its dividend following nearly a 40% fall in earnings as lockdowns hit production. Consumer brand Unilever (LSE:ULVR) has managed to maintain its payouts to shareholders so far, while tobacco maker Imperial Brands (LSE:IMB) is being added to portfolios despite cutting its dividend by one-third in May amid falling revenues.

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.

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