New fund backs rise in payouts as dividends soar A new fund being launched on Monday hopes to cash in on record levels of growth in share payouts. But a dividend expert warned this week that investors should choose carefully which fund they back after a third of UK equity income funds cut their payouts last year. The latest Dividend Monitor from Capita Registrars published on Monday revealed that payouts from UK companies climbed to a record £67.8bn in 2011, up almost a fifth over the previous year. They could soar to £75bn in 2012, Capita predicted, led by Vodafone, which will pay £2bn at the beginning of February from its holding in Verizon Wireless. But Brian Dennehy, investment adviser with Dennehy, Weller & Co, said the growth figures bring into focus how poor the dividend-paying equity income funds had been in 2011. Individual shares increased payouts by 12.8 per cent in 2011, excluding special dividends and the return to payouts by BP. But in stark contrast the average UK equity income fund was up just 5.27 per cent," Mr Dennehy said. Worse still, a third of funds actually cut their payouts. Against that background, the fund manager Fidelity's new Global Dividend fund hopes to use dividends to achieve annual growth of 4 per cent. Daniel Roberts, manager of the fund, said: "The long-term rewards available through dividends are anything but boring. Over the past 10 years, if we consider nominal price returns, investors would have earned a return of 11 per cent. But if we look at total returns, investors who reinvested income made a much healthier total gain of 42 per cent. Ben Yearsley, investment manager at Hargreaves Lansdown, said that dividend income is often ignored. Investors own the company. And the point of investing is to take a share of the profits: in other words a dividend. This often gets forgotten," he said. The key to getting decent returns with equity income funds is to leave the dividends in the fund. That way the growth quickly multiplies. "Many underestimate the power of dividends, dismissing yields of 3 to 4 per cent, but in a low growth environment such as right now, that can give you a good headstart for achieving 8 to 10 per cent a year," Mr Yearsley said. He pointed to figures published in the Barclays Equity Gilt Study which show that if you had invested £100 in 1900, and taken the dividends out each year, the capital would now have grown to £180 in real terms. However, if you had reinvested the dividends the £100 would now be worth £24,133. But Mr Dennehy warned investors to rethink their approach if they want to achieve long-term growing income. The greatest payout growth will come from cyclical businesses - not the likes of Glaxo and BAT. So investors need to focus less on day-to-day moves in share prices and more on the lack of volatility and relative predictability," he said. Think of an income portfolio like your heart pumping out blood: the heart continually changes shape as it pumps. The capital value of your income portfolio will also vary from day to day, but there will be a steady flow of income, growing income. Funds he favours are JOHCM UK Equity Income and Schroder Income.