Mark Dampier: Don't let dividends become an obsession in equity income funds

Regular readers of this column will know I am a great fan of equity income funds, and have been for a long time. Most aim to increase the value of investor's capital over the long term and provide a growing income. This tends to appeal to investors at or approaching retirement, but for those reinvesting dividends from a younger age total returns can be very good as well.

Equity income funds are not without risk, though. Companies often cut dividends during recessions and the ups and downs of the business cycle means companies will experience challenging periods from time to time.

With a fund your investment is spread across many different companies so there is less chance of seeing a total wipe-out. Yet from time to time funds run into problems, as I was reminded recently when looking at the Newton Higher Income Fund.

In a nutshell, under previous management too much emphasis was placed on growing income. This ultimately made the level of dividend unsustainable, resulting in a significant cut, while the capital value was also hit. My advice to equity income managers has always been to protect capital first and worry about the income second; without capital you cannot possibly protect and grow the income in the long run.

Newton Higher Income has seen its level of income drop each year for the past three years. Christopher Metcalfe, who recently took over as manager, is hoping this will be the end of the cuts. He will aim to begin growing the dividend again over the long term, but not necessarily on a year on year basis. This is a more sensible approach.

Mr Metcalfe does not expect much growth in the UK market in the short term, believing interest rates will remain low throughout 2015. He thinks high levels of debt, higher energy costs and globalisation could contribute to a period of deflation, or falling prices.

At the company level Mr Metcalfe's focus remains on sectors and stocks with high cash flow, from which they can continue paying and growing dividends. He is overweight in healthcare and feels we have passed the peak of patent expirations and are entering a period of exciting new products, with potential blockbusters in the pipeline.

He's also keen to use the 20 per cent allowance for holding non-UK listed shares. Where he struggles to find yield among large UK companies he would rather look overseas.

The portfolio is currently quite concentrated at 52 holdings and he anticipates some turnover as he continues to realign the fund towards income-generating stocks that he believes can offer more protection on the downside. He is also likely to reduce the technology exposure that was introduced under the previous manager, as most don't pay enough income. He cites Microsoft and Apple as examples, but he remains keen on Sage and plans to continue holding the company.

So far he is about two-thirds of the way through the restructuring, so the remaining changes will mostly be at the margins; he thinks the portfolio is in good shape overall.

Investors have had a difficult time with this fund over the past few years. Given that Newton is a well-known income house this is also a poor reflection on them. That said, I do think Christopher Metcalfe is the right manager to be running this fund and in my view it is a shame he wasn't put in charge previously. If you are an investor and have been patient for this long, I think it is worth giving Mr Metcalfe a little more time.

Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. For more details about the funds included in this column, visit www.hl.co.uk

Independent Partners; Do you need financial advice on your investments, pension or insurance? Book a free consultation with an independent Financial Adviser at VouchedFor.co.uk

Life and Style
love + sex
Life and Style
Tikka Masala has been overtaken by Jalfrezi as the nation's most popular curry
food + drink
News
people
Voices
A propaganda video shows Isis forces near Tikrit
voicesAdam Walker: The Koran has violent passages, but it also has others that explicitly tells us how to interpret them
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Reach Volunteering: External Finance Trustee Needed!

    Voluntary post, reasonable expenses reimbursed: Reach Volunteering: Would you ...

    Christine McCleave: FP&A Analyst

    £36,000 - £40,000: Christine McCleave: Are you looking for a new opportunity a...

    Recruitment Genius: Sales Executive - OTE £40,000

    £15000 - £18000 per annum: Recruitment Genius: This is a great opportunity for...

    Austen Lloyd: Law Costs HOD - Southampton

    £50000 - £60000 per annum + Excellent Salary: Austen Lloyd: An outstanding new...

    Day In a Page

    Syrian conflict is the world's first 'climate change war', say scientists, but it won't be the last one

    Climate change key in Syrian conflict

    And it will trigger more war in future
    How I outwitted the Gestapo

    How I outwitted the Gestapo

    My life as a Jew in wartime Berlin
    The nation's favourite animal revealed

    The nation's favourite animal revealed

    Women like cuddly creatures whilst men like creepy-crawlies
    Is this the way to get young people to vote?

    Getting young people to vote

    From #VOTESELFISH to Bite the Ballot
    Poldark star Heida Reed: 'I don't think a single bodice gets ripped'

    Poldark star Heida Reed

    'I don't think a single bodice gets ripped'
    The difference between America and Israel? There isn’t one

    The difference between America and Israel? There isn’t one

    Netanyahu knows he can get away with anything in America, says Robert Fisk
    Families clubbing together to build their own affordable accommodation

    Do It Yourself approach to securing a new house

    Community land trusts marking a new trend for taking the initiative away from developers
    Head of WWF UK: We didn’t send Cameron to the Arctic to see green ideas freeze

    David Nussbaum: We didn’t send Cameron to the Arctic to see green ideas freeze

    The head of WWF UK remains sanguine despite the Government’s failure to live up to its pledges on the environment
    Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

    Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

    Set in a mythologised 5th-century Britain, ‘The Buried Giant’ is a strange beast
    With money, corruption and drugs, this monk fears Buddhism in Thailand is a ‘poisoned fruit’

    Money, corruption and drugs

    The monk who fears Buddhism in Thailand is a ‘poisoned fruit’
    America's first slavery museum established at Django Unchained plantation - 150 years after slavery outlawed

    150 years after it was outlawed...

    ... America's first slavery museum is established in Louisiana
    Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

    Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

    The first 'American Idol' winner on how she manages to remain her own woman – Jane Austen fascination and all
    Tony Oursler on exploring our uneasy relationship with technology with his new show

    You won't believe your eyes

    Tony Oursler's new show explores our uneasy relationship with technology. He's one of a growing number of artists with that preoccupation
    Ian Herbert: Peter Moores must go. He should never have been brought back to fail again

    Moores must go. He should never have been brought back to fail again

    The England coach leaves players to find solutions - which makes you wonder where he adds value, says Ian Herbert
    War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

    The battle for Mosul will unleash 'a million refugees'

    Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn