Attractive yield and growing dividend: abrdn Equity Income Fund

AEI offers investors an attractive yield and growing dividend…by Josef Licsauer

Overview

Thomas Moore, manager of abrdn Equity Income (AEI), employs an index-agnostic strategy when investing in the UK market, focusing on selecting individual stocks that he believes are best placed to deliver an above-average income, as well as real growth in capital and income. This approach affords him greater flexibility to identify opportunities across the market, without being tied to specific index compositions.

Over the last 12 months, amid historically low valuations, Thomas has found a number of attractive opportunities across the market, identifying value in some of the UK’s larger businesses and increasing existing positions in holdings like Hargreaves Lansdown and Imperial Brands (see Portfolio). Additionally, his index-agnostic approach allows him to explore areas the more traditional equity income strategies might avoid, such as the lower-yielding companies further down the market cap scale. This is an area he’s found value in recently, initiating new investments in Assura and Energean.

AEI’s portfolio balances companies exhibiting high income with those with dividend growth potential, which has led to AEI offering investors a high Dividend yield of 7.3%. This is at a significant premium to the FTSE All-Share Index’s yield of 3.8% and ranks second highest within the AIC UK Equity Income sector. On top of a high yield, AEI has built up a strong track record of consistently growing its dividend over time, with 2023 marking its 23rd consecutive year of increases.

While Thomas’ strategy has proven highly effective at times, AEI’s Performance has lagged the index over the past five years, owing largely to a higher allocation to economically sensitive smaller companies and being more value tilted, given the high-income focus. However, a recent uptick in smaller company performance, driven by positive economic news, could suggest potential for performance to improve this year.

Analyst’s View

AEI stands out in the Equity Income sector for its high yield of 7.3%, while it has also displayed reliable consistency in increasing its Dividend year-on-year. Given Thomas’ smaller companies focus, AEI’s portfolio looks quite different to its peers. In our view, this differentiated strategy and track record of delivering an income to shareholders well above that of the sector and index average makes it both an attractive investment for high-income hunters, and potentially a complement to most traditional UK equity income portfolios.

AEI’s recent Performance has been encouraging. Positive economic news around the falling inflation story and reducing concerns around a recession, has alleviated some of the pressure mid-cap companies have been under over the last few years. This has resulted in an uptick in performance for smaller companies. Given AEI’s portfolio has a greater allocation to this part of the market compared to the peer group and index average, this has boosted performance. However, over the last five years, AEI’s total return Performance has been disappointing, largely due to its greater allocation to mid-caps. These businesses have suffered greatly from economic pressures like stubbornly high inflation, rising interest rates, and geopolitical tensions.

Looking ahead, we think that AEI’s current portfolio is well placed to benefit from improving market sentiment and strengthening economic conditions, which could lead to a turnaround in performance. In that case, we also see potential in AEI’s current 6.3% Discount, which is slightly wider than its five-year average, narrowing which could boost returns for investors.

Bull

• Offers one of the highest yields in the sector, supported by strong reserves
• Differentiated portfolio including a bias to small and mid-caps
• Trust has recently reduced its charges

Bear

• Exposure to small and medium-sized companies may bring more sensitivity to the UK economy
• Use of gearing could magnify the gains but also the losses
• Value-tilted portfolio could struggle in a growth driven environment

Disclaimer

This is a non-independent marketing communication commissioned by abrdn. The report has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on the dealing ahead of the dissemination of investment research.