3 Pillars of Large Cap Income | The morning star


Let’s take a closer look at some UK income stocks held by the funds with the highest Morningstar analyst ratings.

Selected with 41 funds rated Gold for certain share classes, Franklin UK Equity Income, JPM US Equity Income, M&G Optimal Income are the only income-focused offerings among a multitude of index, small business and recovery funds.

AstraZeneca

Starting with Franklin UK Equity Income (W inc), the latest Morningstar Direct portfolio data from October 31, 2021 shows that Covid-19 vaccine pioneer AstraZeneca (AZN) is the fund’s main holding, accounting for just over 5 % of portfolio. .

The fund’s stake in Astra was first incorporated 10 years ago and today stands at just over £ 45million. Morningstar analyst Samuel Meakin said manager Colin Morton “looks for companies that are market leaders in their respective fields, with the ability to generate strong free cash flow returns above their dividend yields, to allow a potential for dividend growth “.

“Stocks with lower dividend growth potential but higher dividend yields are also included when Morton believes that a stock is poorly valued and is confident in the sustainability of the return and cash generation. the company, ”adds Meakin.

“Colin Morton prefers strong large cap companies with cash flow, earnings and dividends that compound over time. “

Astra is a good example. Before the pandemic, it was viewed as a stable, reliable, but generally not very exciting stock of income. Now, with its vaccine-fueled gains, the company is the largest in the FTSE 100.

After its recent progress, the shares of the broad-moat company are considered fairly valued by analysts at Morningstar. This is because its yield of around 2% may be lower than the FTSE 100 average, but investors should take into account the reliability and the company’s progressive dividend policy, which aims to maintain or increase online payments. with the profits.

And, on that note, annual dividends have been above 2p per share since 2016 and the company hasn’t canceled dividends last year like so many big names did. He continued to pay last year, in March and September, as he did this year. Without gains on the share price that would be commendable, but shares have doubled over the past five years to around £ 84. Overall, that sounds pretty commendable.

ConocoPhillips

Focusing on the United States, JPM US Equity Income also has a Gold Morningstar Analyst Rating for the K (inc) share class.

By a small margin, oil major ConocoPhillips (COP) is the largest holding in the fund with a weighting of 2.70%. Like AstraZeneca, Morningstar analysts believe Conoco shares are properly valued and also have a yield above 2%. Shares of the US oil company have risen 25% in the past six months after a deadly 2020 for the energy sector – and at around $ 72 per share, they are now above pre-pandemic levels .

Morningstar oil analyst Allen Good says ConocoPhillips stands out in a crowded area because of its approach to returns on capital. “Its strategy makes it an attractive option in the energy sector, given its commitment to capital restriction and a clear policy of returning liquidity to shareholders,” he said.

Considering the volatility of the oil industry over the past several years, the Texas-based company is also an all-weather stock. “Its low cost portfolio gives it high yield investment options to grow in a rising price environment, while its strong financial position keeps the dividend safe in a down cycle,” Allen adds.

Semiconductor manufacturing in Taiwan

Since M&G Optimal Income is a fixed income fund (its main holding is UK gilts) it cannot be included in our list.

We therefore move on to funds rated Silver, which constitute a larger group of funds still sparsely populated with income offers (12 funds out of 110). Shifting the focus east, we take a look under the hood at Schroder Asian Income (Z Inc), which also has the maximum Morningstar sustainability rating of 5 globes.

“Investors should be aware that given the revenue mandate, the strategy is likely to lag in high growth or momentum-driven / narrow markets such as 2020,” said Morningstar analyst Lena Tsymbaluk .

That year, the market’s performance was driven by a handful of Chinese e-commerce and consumer names, including Tencent (TCEHY), Meituan (MPNGF), JD.com (JD) and Baidu (BIDU), which do not pay dividends; their absence from the portfolio detracted from relative returns.

“That said, long-term performance has been strong (since December 2009), above all benchmarks, with superior downside protection and lower volatility,” she adds.

The main holding of the fund is the favorite of emerging markets funds and former title of the week, Taiwan Semiconductor Manufacturing (2330), or TSMC for short. Despite serious capital gains in recent years (25% yoy and 236% over five years), Morningstar analysts believe the stocks are still undervalued to T $ 613, with a fair value of 800. TSMC is seen primarily as a growth stock, but it returns just under 2%. Looking back on 10 years of data, TSMC has been increasing its dividends since 2015, and the payout has not fallen below 10 Taiwan dollars, even during the crisis period of 2020.


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