Are funds a safer way to generate income from dividends than individual company shares? The answer is generally ‘yes’, but not to the extent as you might imagine.

Individual companies can cancel or scale back dividends at their own discretion, meaning anyone owning such a company would suffer a drop in income in this circumstance.

Theoretically a fund shouldn’t be reliant on a single source for income, so there isn’t the same level of risk for lower dividend payments if something goes wrong with one or more of its investments.

Yet funds are not risk-free when it comes to dividend cuts.

Over-reliance problem

Data from Morningstar, cited by Neptune Investment Management, shows around a third of funds in the UK Equity Income sector rely on their top 10 holdings to deliver more than half of their yield.

In a first for a fund manager, Neptune is set to reveal the extent to which dividend yield is diversified across its range of equity income funds.

A new section titled ‘Dividend Risk’ will be added to its website and factsheets of Neptune Income (GB0032325093), Neptune Quarterly Income (GB00B8J70J62), Neptune US Income (GB00B909HB91) and Neptune Global Income (GB00B91SJC09).

This new resource will highlight the proportion of yield that comes from the top 10 holdings. The figures will be updated monthly.

At present, the top 10 holdings in the Neptune Income fund, for example, account for 25.8% of the total yield.

Aiming for transparency

Neptune’s founder and manager of Neptune Income, Robin Geffen, says: ‘In the interests of transparency, we are taking measures to improve investors’ understanding of dividend risk.

‘In today’s low yielding environment, a diversified income stream from equity income funds is a huge help to investors.

‘Understanding the extent to which yield is diversified is of crucial importance, and as such we are proud to be the first fund manager to make this information readily available to investors.’

It will be interesting to see if other asset managers follow Neptune’s lead. We wouldn’t be surprised to see dividend risk become as readily available as data such as active share (the percentage of holdings in a fund which differ from the benchmark).

The financial regulator FCA is pushing for more transparency in the asset management industry and Neptune’s actions certainly seem to tick the right box. (TS)

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