Fraser Mackersie and Simon Moon, co-managers of the £637m Unicorn UK Income fund, have said they are not worried about dividend cover for parts of the UK equity market, saying their portfolio has benefitted from a number of companies paying special dividends.
The latest Dividend Dashboard from AJ Bell showed the FTSE 100 companies with the "juiciest looking" dividend yields also have some of the lowest levels of dividend cover, fuelling concerns amid income investors.
However, Moon and Mackersie said ten of the companies in their fund paid a special dividend in 2016, and seven so far in 2017, with the number by year-end expected to be similar to the previous year's.
A special dividend is a one-time distribution of corporate earnings, which usually stems from a period of particularly good profits.
Moon said: "We are not worried about lack of dividend cover because in the pool we fish in - the small- and mid-cap space - growth has been coming through and the stream of regular special dividends has been strong.
"We have a significant level of cover on the underlying holdings and have a lot of faith in their ability to continue paying them, pay a bit more or even pay a special dividend on a regular basis."
Moon's confidence comes as he believes conditions remain favourable with regards to balance sheet strength, high levels of cash generation and the potential for further organic market share gains.
He added: "A similar number of companies paid special dividends last year, including five of the names that have paid one this year, indicating a strong, ongoing trend."
Some of the companies that have managed to pay a special dividend include those in the consumer discretionary space - an area which some investors have avoided due to uncertainty about Brexit.
Moon said: "Anything with a consumer discretionary backdrop has been widely out of favour for the majority of the first half of this year. These groups of companies were being sold off as baskets, but we were buying names, such as Card Factory, throughout the whole period.
"There is always an opportunity when a sector has gone out of favour. Similarly, Marshalls, which is a building materials company but has a consumer end market, was being sold off, but we added to it. The company has been tremendously resilient."
The managers added while they did not benefit from the depreciation of sterling following the EU referendum, they are happy to be less exposed to the reversal of this trend, which is starting to take place.
"We tend not to be affected by the trials and tribulations of sterling. We saw the effect it had further up the market-cap scale, which was a real tailwind, but as that wanes it could end up being a bit of a headwind," they said.
"We have not faced that and we will not be disadvantaged by it this year. It always comes back to that point about the quality of the underlying dividend. We do benefit from special dividends, and they tend to be repetitive in nature."
Over three years to 2 October, the fund has returned 38%, outperforming both its FTSE All Share benchmark return of 32% and its IA UK Equity Income sector average of 30%, according to FE.
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