VIEW-Liontrust banks on "ugly" stocks for dividends

LONDON (Reuters) - The Liontrust First Income Fund is betting on sold-off, "ugly, risky" stocks with solid dividend growth to help it maintain returns in anticipation of sharply lower banking sector dividends.

Jeremy Lang, manager of the 541 million pound fund is favouring global branded companies like British American Tobacco, Diageo and GlaxoSmithKline. More risky stocks on his radar include retailers and good quality engineers.

His view echoed that of Tony Nutt, manager of the Jupiter High Income Fund, who told Reuters earlier this month that he was looking at retail, tobacco and pharmaceuticals as a replacement for banks.

Lang said: "The First Income Fund will be a strange looking beast: a blob of ugly, risky-looking stocks on distressed yields nestled beside a chunk of solid dividend growing stocks."

He defines "ugly" stocks as those which are oversold, but have a high initial dividend.

As of September 30, the fund has about 20 percent each in industrials, financials and consumer services. It had 9.3 percent in oil and gas, 7.36 percent in health care, 6.22 percent in consumer goods and the rest divided between telecoms, utilities, basic materials and technology.

Lang predicts aggregate dividend payments in the United Kingdom will fall sharply next year, led by the banks.

Under its recapitalisation plan, the British government wants taxpayers' money to be repaid before dividends can be paid to shareholders in Lloyds, HBOS and RBS. Analysts also expect Barclays and HSBC to cut their dividends next year, sharply reducing the around 11 percent of FTSE 100 dividends seen from the sector last year.

CHALLENGING