Dividend growers key to a diversified UK equity income fund

Identifying companies with strong dividend growth prospects is crucial to the management of a truly diversified UK equity income fund, says Alex Odd, manager of the M&G Dividend Fund.

The traditional approach of focusing solely on high-yielding stocks is fraught with risk because the sources of dividend payments within the UK market have become increasingly concentrated in a narrow range of sectors such as pharmaceuticals and tobacco.

"By limiting the investment universe to those companies that just have a high yield, it is difficult to achieve genuine portfolio diversification and the volatility of both income and returns is increased," says Alex Odd.

Alex therefore balances the portfolio's holdings in high yielding stocks that demonstrate genuine value with investments in companies with strong dividend growth prospects. He also invests part of the fund in special situations companies - turnaround or recovery stocks - so that he has three sources of income.

As a result, the sources of income in the £528 million M&G Dividend Fund are much more diversified than either the FTSE All Share Index or the FTSE High Yield Index, often the cornerstone of more conventional income funds.

This unconstrained and pragmatic approach to UK equity income is already generating superior returns. Since Alex took over the management of the M&G Dividend Fund in July 2010, the fund has delivered a total return of 26 per cent compared with a sector average of 20 per cent.