* Portfolio dividend yield over 5 percent
* Fund targets sustainable dividends
* Has cut luxury, autos, chemicals, industrials exposure
* Overweight utilities, likes pharma
* Top stakes in Unilever, GlaxoSmithKline, Royal Dutch Shell
By Simon Jessop
LONDON, Sept 22 (Reuters) - ING Investment Management's European dividend fund has exited higher-risk cyclicals and likes pharmaceuticals for sustainable dividend yield growth, a co-manager of the fund told Reuters.
ING's Invest Euro High Dividend fund managed around 450 million euros ($571.6 million) at end-July, according to Lipper, and counts British consumer goods group Unilever and pharmaceutical giant GlaxoSmithKline among its top holdings.
The fund targets stocks with a prospective stable dividend yield of at least 2.5 percent and then looks for growth stories, and the current portfolio yield is around 5 percent, said Manu Vandenbulck, senior investment manager equities-value.
"Dividends are the main source of total equity returns. The dividend and the dividend growth are the primary contributor for an equity investor," said Vandenbulck, but dividend yield was key as "dividend growth and capital returns can turn negative".
After playing higher-risk cyclicals in the bull run of last year, the fund has exited sectors such as chemicals, autos and luxury, and has taken profits and reinvested around half again in certain other cyclicals, such as some industrials, he said.
The rest of the cash has been ploughed into more traditional sectors, specifically pharma and utilities, where the fund is overweight.
Vandenbulck said he considered utilities a longer-term bet, even though the sector is down around 5 percent on the year, against a 10 percent uptick in the European stock market as a whole.
"We are overweight utilities today, because, although dividend yields could be cut, the dividends as such will continue to be paid, so you will end up with an attractive dividend yield on a longer term perspective," he said.
Among its other large holdings, according to a fund factsheet, are French oil major Total, Swiss drugmaker Novartis and Scottish and Southern Energy.
The Invest Euro High Dividend fund was up 0.28 percent in the 12 months to end-August, according to Lipper data, and outperformed its peers in the Lipper Global Equity Eurozone sector by 0.71 percentage points.
The prospect of low earnings growth in a tepid and patchy recovery means dividend plays will become increasingly attractive, said Vandenbulck.
"Not only because you have lower volatility and a lower risk profile, but you also have this extra yield on your equities, where capital gains will be more capped," he said.
Against this backdrop, Vandenbulck said his fund's focus on sustainable dividends took on added importance and was different to pure high dividend plays that select stocks with a high trailing dividend yield but ignore potential dividend cuts.
"We look not only at the attractiveness of a single stock but we always look at the quality of the balance sheet and the dividend cover, to what extent is a dividend covered by earnings or free cash flow," said Vandenbulck. ($1=.7523 EURO) (Editing by Jon Loades-Carter)