Miton’s Moore on how he keeps dividends growing

Sterling weakness has given Miton’s Eric Moore a big boost to dividend growth for his UK Equity Income fund.

On his £198.3m Miton Income fund, which Moore took over in 2013, dividend growth figures for the past year at the end of March increased by 5.1 per cent, a constant 5 per cent over the past four years, the manager notes.

Speaking to Fund Strategy, Moore says: “The markets have been brave and the fund has outperformed. What I am very focused on is growing the dividend that we pay to our unit holders and trying to grow the dividend by 5 per cent in a consistent way per annum.

“Dividends have increased 5.1 per cent year on year to March 2017 and that’d be four years in a row to have 5 per cent and if you keep doing that it really drives your total returns.”

The dividend last year was 4.21p and so far this year is 4.43p.

The fund manager explains that the reason to keep the dividend on a consistent 5 per cent a year is that it is a “broad” fund prepared for any market outcome.

The portfolio has a blend of some stocks that have a high yield but not that much dividend growth and some companies that have a low yield but lots of dividend growth.
Moore says: “The market dividend growth will be a bit more variable in 2017 but my thought is that we need to give people reasons to own a fund rather than having individual shares or just a tracker.
“With a fund you can use the fact that it is a broad vehicle to manage into an outcome so that is why I set up a 5 per cent target.”

However, what has helped the fund maintaining the dividends last year has been the sharp fall of the pound only having a third of its revenue coming from the UK.

He says: “Coming into the year we were quite worried about the outlook of dividend growth because in the calendar year of 2015 there were a lot of dividend cuts and so coming into 2016 we were worried. But we had a big boost from the fall of the pound.

In the UK Equity Income fund the manager invests the largest holding in international stocks such as GlaxoSmithKline, which has less than 10 per cent business in the UK.

Moore says: “What really helps dividend growth in some stocks like BP or Shell, is that they do all their accounting in dollars and declare dividends in dollars.

“41 per cent of the income we generate in the year is in dividends not declared in pounds. Even if there is not underlying growth, the currency impact has given us a lot of growth”.

What are the challenges for income funds?

Moore says the biggest challenge for income funds is that fact that yield in the index is corralled in very big firms so fund managers need to find other sources of income and avoid weighing too much on the biggest firms.

Around 12 companies in the FTSE100 represent half the income.

At they stand now, Shell which is 8 per cent of the market yields 6.7 per cent, HSBC which is 5 per cent of the market yields 6 per cent, BP yields like Shell and makes 3 per cent of the market.

Moore says: “If we are still in a low growth world then growth is going to be hard to find. The other thing still a bit awkward for income and why some of the funds left the sector and complained about the sector is that the availability of yield in the market is quite narrow.
“The very big stocks drag the yield of the market up so if you try to beat the average yield in the market, it is very skewed by these companies.”

Moore says companies to “probably worry about” are Shell and BP because if the oil price goes back to $30 “those dividends are gone”.

He says: “The tricky thing for income funds is that I am happy to participate in those companies but I don’t want to have too much so I need to find sources of income somewhere else.”

To date, the Miton Income fund has returned 29.6 per cent against the UK Equity Income sector of 20.8 per cent over the past three years, according to FE.