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Franklin UK Equity Income Fund

Ed Monk

Ed Monk - Fidelity Personal Investing

Just as many investors have been getting worried about prospects for the UK, Colin Morton, manager of the Franklin UK Equity Income Fund, has been relishing the income opportunities on offer.

A sell-off of UK shares in the past year has made many areas of the market very attractive to income investors because it has pushed the dividend yield - the percentage of the price of the shares that is then paid out as a dividend - higher.

“Areas that weren’t yielding much a year ago are suddenly now very interesting to us”, he said in a recent interview with Fidelity Personal Investing.

He cites housebuilders as an example of a sector that has not traditionally been a home for equity income investors, but which now offers attention-grabbing levels of potential income.

And this isn’t the only way in which Morton has been able to gain from the uncertainty facing the UK. A weaker pound in the period since the EU referendum has inflated the pounds and pence earnings of large UK companies which earn in overseas currencies.

Meanwhile, an elevated oil price has shored up the dividends of the two major oil companies listed in the UK - BP and Shell.

The risk of a very damaging exit from the EU and a hit to the UK economy was real, Morton said, but he added that most dividends would survive in all but the worst scenarios.

He said: “As an income investor, my glass it half-full right now. There are lots of good companies offering really good yields, and the outlook is good. Of course there can be casualties and dividends can be cut, but if you look at the biggest yields now in areas like the housebuilders, life insurers and oil, they could actually be cut in half and still offer a decent yield.”

Morton manages the Franklin fund alongside colleagues Ben Russon and Mark Hall. The focus, he says, is on companies where the dividend is not just high compared to the market, but sustainable and likely to grow.

“We all know that more than half your return in the long term comes from dividends being reinvested, but the growth in the dividend is also crucial to that long-term return“, he said.

The fund yields above 5% currently, which is around 10% higher than the market overall and is not guaranteed. Understanding the underlying operations of a business is crucial in assessing its ability to pay an income, Morton says, and much of the team’s efforts are focused on that task.

More on Franklin UK Equity Income Fund

Important information

The value of investments and the income from them can go down as well as up, so you may get back less than you invest. Select 50 is not a personal recommendation to buy or sell a fund. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.