DIY Investor Magazine
| August 2017
28
SMALL AND MID-CAPS FOR…INCOME?
The UK dividend seeker’s dilemma: avoiding too much income concentration.
Laura Foll
Lowland Investment Company
The concept surrounds a fairly well-penned story in
the press about how the vast majority of the UK’s
dividends are paid by a small cadre of the top FTSE 100
companies: the top 20 companies hand-out 70% of all
UK dividends paid; the top 10 pay 50%; the top five pay
35%.
But what choice do we have? This is the structural
nature of the UK’s stock market.
Actually, there is choice, and it’s a great argument
for the professional oversight of good active fund
managers. They are not forced to overly concentrate
their portfolios in pre-determined amounts according
to index weightings; they are free to balance perceived
risks and extract income from a variety of sources as
they see fit.
Laura Foll, Co-Fund Manager of the Lowland Investment
Company - a UK focused investment trust that invests
in all sizes of companies to try to grow your capital as
well as provide a good level of income - points to how
the issue of structural income concentration is dealt with
in the portfolio: diversifying the income stream through
small and mid-capitalisation stocks, ordinarily unloved
by the income seeking portfolio manager but with the
potential of being great yield stories.
AN UNEXPECTED JOURNEY
The small and mid-cap space is usually reserved for the
growth investor – those seeking above average levels
of earnings growth, which they believe will translate into
strong share price returns. Large caps have tended to
be more associated with income seekers.
The income rationale behind larger businesses is that
strong and stable companies with entrenched market
positions and experienced management tend to be very
focused on creating shareholder value and therefore
delivering steady or rising levels of dividends. But Laura
points to the fact that there are plenty of businesses
further down the size scale that engender these
qualities. In fact, she says, in the Lowland portfolio they
are some of its highest yielding stocks.
Looking at the broader evidence, the FTSE 250 – the
UK’s mid-cap market – is forecast to pay a 3.0% yield
this year; the FTSE Small Cap is forecast to pay 3.1%.
This compares to the higher yielding FTSE 100, which,
although yields a higher 4.2%, has a lower level of
dividend cover. Because of their lack of liquidity, mid
and small cap stocks are often under-researched
by analysts. Less coverage means less information
feeding into the stock market and the share price, giving
the savvy investor a greater chance of uncovering
undervalued stocks with attractive yields.
Laura points to the following as great examples of
high yielding stocks from lower down the market-cap
scale, where small-cap is defined as a company worth
less than £500m. Please remember though, these are
portfolio stock examples and not recommendations to
buy.
MOTORING AHEAD – REDDE
When your car breaks down or you’re involved in an
accident, a few things are crucial in rectifying your
situation: you need to get the car fixed and pay any
legal or medical expenses that may need covering.
You also need a replacement car for the interim. Redde
assists the insurers with a few of these jobs - running
fleets of courtesy cars and operating repair garages.
