UK Equity Income - November Update.

The market rally finally ran out of steam in October, giving higher-yielding stocks some much-needed time in the spotlight. The FTSE 350 Higher Yield index dropped by 1.6%, compared with a fall of 2.14% in its Lower Yield counterpart. The fall in markets also raised the yield on the FTSE 100 from 3.44% to 3.51%.

Shell and BP had been seen as the most vulnerable dividends, so it was a relief to income-seekers when Shell raised its dividend by 5%. GlaxoSmithKline had not been seen as a risk, but there was still comfort in its 7% dividend hike. Elsewhere Carpetright, one of the early victims of the recession, announced it would raise its dividend again next year, having cut it in June.

Ryanair also mooted a change in its dividend policy, saying it would return money to shareholders if it could not agree terms with Boeing over the delivery of new aircraft, although it was not clear whether this was competitive posturing or a genuine possibility.

There was little conspicuous bad news for equity income investors. Helphire, a group providing courtesy vehicles after accidents, was the only major company to announce a cut, announcing it was to scrap its dividend after it reported a loss of nearly £150m.

Analysis by Markit has suggested the cuts that had characterised the first half of 2009 are about to reverse on the back of an improving economy, margin improvements, sterling weakness and cost-cutting. A survey by the group found the proportion of companies in the All-Share reducing dividends would fall from 31% this year to 8% next year. 5% of those companies that had suspended payouts in 2009 would reinstate them in 2010.

By the end of the month, the situation with the banks remained unclear. The UK Government announced it planned to inject a further £37bn into Lloyds Banking Group and Royal Bank of Scotland and an ING-style break-up looks to be on the cards. Either way, it seems unlikely these former dividend stalwarts will resume payouts any time soon.

Despite the reversal in markets, the UK Equity Income sector is still lagging the UK All Companies grouping over the year to date. The average UK All Companies fund is up 24.28% over this period, compared to just 18.04% for the UK Equity Income sector. However, both sectors remain well ahead of the newly created UK Income & Growth sector, which is up just 15.36%. The returns from the UK Equity Income sector remain disparate, however, with the top fund up 52.23% over the year to date and the bottom fund down 8.99%.