Cash in on overlooked UK stocks offering income and growth

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The Schroder Income Growth Fund has a clear dual objective: to deliver a reliable dividend income and long-term capital growth. Since its launch in 1995, it has raised its dividend every year, earning a prestigious “Dividend Hero” badge from the Association of Investment Companies.

Over the medium term, the trust aims to grow income ahead of inflation, helping investors preserve and build wealth in real terms.

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By blending holdings that provide strong dividends today with those positioned for sustainable growth tomorrow, the portfolio is diversified by style, sector and size, helping it deliver consistently on its objectives. As sentiment towards UK equities improves, the trust’s flexibility and discipline stand out.

Three profitable UK stocks

Intermediate Capital Group (LSE: ICG) is an overlooked powerhouse in the fast-growing world of alternative assets. ICG operates in resilient, growth-orientated markets and has grown its fee-earning assets at an annual rate of 18% over the past eight years. Despite this, ICG trades at a notable discount to peers and to its own history.

Since we originally invested in it 2011, ICG has been nothing short of transformative for our shareholders. It has produced a tenfold return, powered by both capital growth and the compounding effect of rising dividends – with two-thirds of gains attributable to income.

We consider ICG not just a successful long-term investment (a “multi-bagger”), but also our highest-conviction holding, reflecting our confidence in its ability to keep compounding value well into the future.

Balfour Beatty (LSE: BBY), a construction and infrastructure group, has undergone significant transformation. When we invested five years ago, the business, once known for chasing growth at any price, was in transition. Today, it has reinvented itself, concentrating firmly on cash flow, profitability and shareholders’ returns.

Renegotiated contracts have reduced risk and improved predictability, while disciplined allocation of capital has delivered results. Over the last five years, Balfour Beatty has pursued a progressive dividend policy and repurchased over a fifth of its shares. This has led to stronger earnings, higher dividends per share, and a robust, healthier balance sheet.

While the share price has reflected these improvements, we see further upside potential.

Meanwhile, Smith & Nephew (LSE: SN), a medical-technology business, has not had it easy, with multiple changes of leadership since 2017. Yet under Deepak Nath, who became CEO in 2022, the group is showing real signs of recovery.

His three-year turnaround plan is gaining momentum. Key divisions, such as orthopaedics, have begun recovering, margins are expanding, and other divisions, such as sports medicine and advanced wound management, are growing consistently and profitably.

An enhanced focus on innovation, operating efficiency, and inventory control has improved cash flows, enabling reinvestment in the business and higher returns for shareholders via increased dividends and share buybacks. Having initiated a position in late 2023 and increased exposure since, we view Smith & Nephew as a business at a positive inflection point, with prospects for renewed growth.

This article was first published in MoneyWeek's magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.

Sue Noffke is the Head of UK Equities at Schroders, bringing 35 years of experience in the UK equity market. Sue has managed the Schroder Income Growth Fund plc since 2010. Her career began at Schroders in 1989 as an analyst and she has managed UK equity portfolios since 1993. Sue holds an Honorary Doctorate and a degree in Business Administration and Biochemistry from Aston University. 