Picking UK dividend winners — Legal & General, Rio Tinto, Prudential
UK dividends saw the fastest pace of growth in 2017 in half a decade, according to the Link Asset Services UK Dividend Monitor. The growth was driven by strong commodity prices and foreign exchange tailwinds.
Rising bond yields
One concern for dividend investors has been the rise in bond yields. Traditional bond—proxy dividend paying sectors like utilities, real estate, and healthcare tend to struggle when investors can get income from the bond market instead.
Eric Moore, fund manager at Miton Income Fund, says falling rates for the last thirty years has broadly been good for income funds, because higher—yielding shares became more attractive on a cross—asset basis, as interest rates and bond yields fell. He adds that these companies also tended to have lower volatility.
Moore says now ‘we are in the foot hills of a change of monetary regime’ towards something more normal, which he says is a good thing. According to Moore, income managers now need to move beyond their historical comfort zones, and exhibit faster footwork in some of the more volatile parts of the market.
Dividends back in the UK banks sector
The financial sector performed well from a dividend stand point during the most recent earnings season. Standard Chartered returned to paying dividends after a two—year break, Lloyds increased its full—year dividend by 20%, and Barclays promised to restart paying out 6.5p per share, after it was slashed by 50% in March 2016. Moore says dividends are picking up in the financial sector and the mining sector, which will help to lift overall UK dividend growth this year.
Top UK dividend picks
When picking dividends, Moore says you simply need a combination of a good yield and dividend growth to drive growth in the long run. Among his top picks is Legal and General in the insurance sector, which has gross dividend yield of 5.87%. It posted a 7% increase in its full—year dividend on the previous 12 months to 15.35p per share. He says he has owned the stock for a long time and it is one of the largest overweight positions in the fund.
Elsewhere, he likes Prudential, Rio Tinto and the pharmaceuticals sector. While there are risks to the latter from rising rates, Moore says this could be offset by higher product innovation.