Investors who bet on income-producing shares are finding that their strategy is, literally, paying dividends, as company payouts rise to a record. Still, beware the dangers of chasing high yields, warns Indxis, a leading independent provider of bespoke indices and investment products.

UK companies paid out over £23bn in dividends during the third quarter of 2012, the most on record, according to Capita Registrars.

UK companies paid out over £23bn in dividends during the third quarter, the most on record, according to Capita Registrars, which is also forecasting total dividend payouts in 2012 of almost £80bn, followed by another record year in 2013.

Capita highlights that special dividends have been a huge feature in 2012, and that underlying growth slowed in the third quarter. Companies in the FTSE 100 currently pay an average dividend yield of 4.5% (gross).

However, instead of chasing companies with sporadic high dividend payments, investors can get high returns and less volatility by investing in companies that incrementally increase their dividend payments over time.

The UK Dividend Achievers Index produced by Indxis has rewarded investors with annualised returns over the past three years of 13.18% in comparison to 7.54% by its MSCI UK benchmark. This rises to annualised returns of 18.44% over one year compared to the benchmark’s 16.49%.

All of the stocks in the index have increased their annual regular dividend payments for the last five or more consecutive years, the basis for inclusion. Large cap stocks dominate the index at over 80.16%, a clear indication that it is companies with a large market cap that tend have the most available cash to pay out to shareholders.

Alan Price, sales director of Indxis, said: “Investors are increasingly looking to dividends to supplement their income this year and they are right to do so. Yet many of these individual investors will be nearing or in retirement and should therefore factor dividend-payment and share price volatility into the equation if they want to preserve both their income and capital.”

Fitch Ratings said investors should be wary of European dividend funds, 40% of which are overweight in financials, utilities and telecoms. Due to increased regulation in these sectors, it highlighted the sustainability of dividend payments need to be carefully considered.

In contrast, companies producing well-known consumer items feature largely in the UK Dividend Achievers Index, including Tesco, SABMiller, Unilever, Diageo, British American Tobacco and Reckitt Benckiser Group, producers of Dettol and Clearasil.

The UK Dividend Achievers Index mirrors the successful family of Mergent Dividend Achievers in the US, which identifies companies with a proven track record of consistent earnings growth and strong cash reserves. It includes UK companies that have increased their annual regular cash dividends for the past five or more consecutive years, providing a regular and reliable income stream for low-risk portfolio strategies.

While US versions of the Mergent Dividend Achievers Index are tracked by a number of NYSE-listed exchange-traded funds (ETFs), including the hugely successful Vanguard Dividend Appreciation ETF (VIG), the world’s largest dividend ETF by assets under management, and the PowerShares High Yield Equity Dividend Achievers Portfolio ETF (PEY), the UK version is not currently tracked by an ETF.

However, investors looking for equity income exposure could consider the SPDR S&P UK Dividend Aristocrats ETF (UKDV), which tracks the S&P UK High Yield Dividend Aristocrats Index, or either the iShares FTSE UK Dividend Plus ETF (IUKD) or Amundi ETF FTSE UK Dividend Plus (AUKD), which track the FTSE UK Dividend+ Index. All these funds are listed on the London Stock Exchange (LSE).