David Taylor: 3 'cash machine' stocks I love to hold

David Taylor and David Horner earned a top AAA rating from Citywire last month for the performance of their Chelverton UK Equity Income fund.

Good track record

Although small, the £34 million fund has impressed investors with its ability to seek out companies paying a growing level of dividend. It focuses on the relatively neglected area of small and medium-sized stocks. At the last count the fund was yielding 6.4%, an indication of the high level of income it had paid to unit holders in the previous 12 months.

Investors who hold the Chelverton UK Equity Income accumulation units, which reinvest the fund's income payouts, have enjoyed a total return of 87% in the past three years. This makes it the second best performing fund in the UK equity income sector, well ahead of the FTSE All Share's total return of 43.9%.

You can find out more about the fund on its factsheet and more about Citywire Fund Manager Ratings in this guide.

We spoke to David Taylor about income investing and which are his favourite dividend stocks.

Shares to help you beat inflation

David Taylor says he is constantly on the lookout for companies who put their money to work and reward shareholders with big dividends.

Taylor says: ‘It now looks as though we could have a period of six or seven years, where interest rates stay very low and the problem with that is everyone then has to look for income because otherwise you start eating into your capital.’

To overcome this he says he looks to companies with a track record of giving special and big dividends.  

‘Some companies generate a lot of cash and they don’t really give it back to shareholders, they sit on it themselves but we like companies that generate cash and continue to grow and grow their dividend but when they do have extra capital they’re happy to give it back to shareholders’, he says.  

Moneysupermarket: sex, drugs and rock 'n' roll

The result of this policy is that the fund has big holdings in price comparison website Moneysupermarket (MONY.L), Cineworld, the UK's only listed cinema chain, and Micro Focus a provider of business software.

He says: ‘Moneysupermarket is our version of sex, drugs and rock 'n’ roll because being an income fund manager you don’t always get a lot of interesting funds. We like its ability to generate cash, it’s so operationally geared.

‘Every couple of years you’ll probably get a special dividend because they generate cash and whatever excess cash they have they don’t sit on and wonder what to do with it, they give it back to shareholders as special dividends.’