There have been some grumbles about the recent underperformance of Neil Woodford’s flagship fund CF Woodford Equity Income, but not from me. As a conviction investor, he has always suffered the odd bad year, but has invariably been vindicated in the end.
What does dismay me is the low level of income on his fund, which yields just 3.3% a year. That is less than you would get on a standard FTSE 100 tracker, with the index yielding 3.66% in March. The fund also has an annual management charge of 0.75%, and although that is deducted from capital rather than income, it further erodes your return. You can get a far higher rate of income, without any ongoing charges (aside from your dealing platform’s quarterly fee), by investing directly in a number of top FTSE 100 companies. The following two thrash Woodford’s yield.
Setting Standard
Many of us still think of Standard Life (LSE: SL) as an insurer, but it has been quietly turning itself into a fund management house. And it has done so just in time to escape the worst of the fallout over the government’s pension freedom reforms, which hammered sales of industry cash cow annuities.
Its proposed merger with Aberdeen Asset Management will continue the process to make it the UK’s largest asset manager with more than ÂŁ660bn in AUM. Aberdeen has been hit hard by its emerging markets focus, as that once hot investment sector turned ice cold, but it brings the benefits of diversification to Standard Life.
Feel the yield
It should also distract attention Standard Life’s outsize Global Absolute Return Strategies fund, beloved of financial advisers, a ÂŁ25bn behemoth that has become too big for its own boots, returning a measly 14.2% over the past five years. The merger should also generate around ÂŁ200m in annual cost savings.
What really excites me about Standard Life is the yield, which is currently a forecast 6%, covered 1.4 times. By the end of 2018, City analysts reckon it could hit 6.5%, almost twice Woodford’s return, thanks to its progressive dividend policy. Standard Life also has exciting growth prospects, with forecast earnings per share (EPS) growth of 57% this year, and 7% in 2018. As with any individual stock, there are risks: recent share price performance has been patchy and it trades at a pricey 19.03 times earnings. But the sky-high yield wins it for me.
Hold on tight
By contrast, global bank HSBC Holdings (LSE: HSBC) has had a storming year, its share price rising 55% in the last 12 months. Despite that, the dividend yield is also mind-blowing, at a forecast 6.3%. The bank has rebounded strongly from its recent troubles yet its valuation is far from toppy, at a forecast 12.9 times earnings.
2016 was a tough year for the company, which incurred a number of one-off charges, including a $3.2bn goodwill writedown in the European private bank and transformation costs of $3.1bn. As a result, reported profits fell 62.3% to $7.1bn, disappointing markets, even though adjusted half-year profits before tax (allowing for exceptional items) were a healthy $19.3bn. Dividend progression may be in short supply in the immediate future, but few will complain given today’s blistering yield.