Investing for income in the UK in 2024 – two fund managers share their views

The UK’s considered a leading market for income investing.

It’s home to some world-class companies providing excellent dividends. Investors are expected to take home nearly £90bn in dividends this year alone.

If you’re looking to build a portfolio to give you a more regular income stream, without having to sell investments, income investing is a great strategy.

Here’s how two HL fund managers invest for income in the UK.

Steve Clayton heads up the team managing the HL Select UK Income fund, part of the HL Select fund range. The fund focuses on building a concentrated income portfolio by investing directly in UK shares.

Ziad Abou Gergi heads up the team responsible for the HL UK Income fund, which generates income through a UK portfolio made up of funds run by multiple expert share managers. It’s one of the Portfolio Building Block funds, which give you an easy and simple way to invest .

This isn’t personal advice. Investments and any income from them can rise and fall in value, so you could get back less than you put in. No dividend is guaranteed. If you’re not sure an investment is right for you, ask for financial advice.

Ziad

“Balance is at the core of what we do so it’s important we are not skewed to any part of the UK stock market – sector, style, or market capitalisation.

We avoid thematic investing or chasing the latest fashionable investment. Instead, we focus on delivering a growing regular monthly income.

To achieve this, we invest in fund managers who are experienced and display a consistency of investment approach. We also believe that experienced fund managers who have seen plenty of investment cycles are best placed to capitalise on market turbulence.”

Steve

“I’d agree with Ziad that the security and growth potential of the dividend matters more in the long run – so the yield itself is only part of the story. When it comes to shares, a high yield can be a sign of low growth potential or a clear risk that the market views the dividend as unsustainable.

Falling profits, low dividend cover and high debts are often red flags for the dividend. We look for strong businesses, with robust balance sheets where growth in the business can feed through to rising dividends. It’s important to diversify an income portfolio across industries and end markets so your income is coming from many different sources.”

Ziad

“First, it’s important to decide how often you are looking for a payout. Monthly, quarterly or perhaps annually. The composition of your holdings will drive your returns and, as Steve’s outlined, you must diversify to balance risks.

This helps to smooth outcomes so where one sector may face struggles, you could balance this out from payouts from other areas. Funds that invest in high-quality and consistent dividend stocks could help you build a strong foundation.”

Steve

“The hard way to try and get a regular income is to build a portfolio of individual shares and bonds that pay dividends or interest across the year, but this is not easy and requires a lot of monitoring.

Some of HL’s funds, like the HL Select UK Income Shares fund that my team manages, pay dividends monthly, smoothing the fund’s income out over the year – this makes it easier for investors seeking regular dividend receipts. Remember, though, dividends are variable and not guaranteed.”

Ziad

“For us, good fund manager track records within UK income are not necessarily those that have delivered the highest total return or with the highest income payouts. In fact, we would be wary of chasing such outcomes. We favour managers that have achieved a consistent track record in performance and income generation.

We value fund manager track records that have grown their pence per unit income distribution consistently over time and have been able to do this whilst outperforming the FTSE All-Share Index over the longer term.

It’s this combination of income growth and longer-term capital appreciation that distinguishes the good fund managers.”

Steve

“Dividend prospects matter far more than those already paid. You can’t go out to dinner on a dividend that a share’s last owner has already banked.

So, focus on the financial strength and trading prospects of the stocks that you are considering for purchase or held within a fund, for that is what your future dividends will depend upon.”

Steve

“The giant company pension schemes of the past required regular income to pay out to their members. That meant investors were often keen to encourage boards to put a high priority on paying dividends to shareholders.

The UK market also has a high exposure to mature sectors with limited reinvestment needs, which allows for regular returns to shareholders. With the investor-base in the UK much changed, it will be interesting to see if the dividend culture remains so distinctly British.”

Ziad

“I think it’s the structure of the UK stock market that makes it a good hunting ground for high dividend-paying stocks. Companies listed here don’t pay withholding tax on dividends which boosts their income payouts.

Furthermore, UK companies are often more established in nature and with a management that, as Steve’s said, recognises the importance of paying out a proportion of profits as cash to shareholders.

It’s this well-managed corporate governance culture of looking after shareholders’ interests that we look to make use of within our HL UK Income Fund.”

The HL Select and HL Portfolio Building Block fund ranges are managed by our sister company, Hargreaves Lansdown Fund Managers Ltd.