However, it is also important to have a diversified portfolio and while many investors hold core UK equity income funds, they have little exposure elsewhere.
BlackRock Continental European Income fund manager Alice Gaskell highlights that there are a greater number of companies in Europe able to pay out a high level of sustainable income as compared to UK income payers.
In the UK, the top 10 dividend companies represent 56 per cent of all dividend income, while in continental Europe, the top 10 dividend companies account for just 23 per cent of dividend income.
Of the 113 European companies combining a dividend yield of more than 4 per cent and a market cap of more than €1bn, more than 80 are on the Continent.
With this in mind, Delyth Richards, head of fund research at Kleinwort Benson, tips three funds she thinks stand out in the European equity income space and don’t take on huge levels of risk.
Standard Life European Equity Income
Richards says the four FE Crown rated Standard Life European Equity Income fund, which yields 3.89 per cent, is the “best in its class” and use the portfolio in a range of income strategies at the wealth manager.
The fund invests in quality dividend payers, so it’s been less volatile than the IMA Europe ex UK sector and the FTSE World Europe ex UK index over the last five years, with annualised volatility of 16.13 per cent.
The FTSE All Share displayed volatility of 13.37 per cent over this period, so investors would be taking on a slightly higher level of risk to move into this portfolio.
Given its quality bias, the fund has trailed the performance of its peers in the IMA Europe ex UK index and the FTSE World Europe ex UK index over the last 12 months. However, over the longer term the fund has outperformed significantly.
Over the last five years, the fund gained 80.31 per cent while the average fund in the sector gained 69.99 per cent. The index picked up 67.22 per cent.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
Manager Will James is backing a number of blue-chips in Europe, including Swiss pharmaceutical giants Roche and Novartis, as well as Danish healthcare firm Novo-Nordisk.
The manager also holds discount airline Ryanair and Swiss bank Swedbank in his top 10 holdings.
Standard Life European Equity Income has ongoing charges of 0.9 per cent, making it the most expensive option on this, though its charges are still lower than the average actively managed fund.
SSGA SPDR S&P Euro Dividend Aristocrats ETF
Because the European equity income sector is so small, Richards says it has been difficult to find good performance with strong enough yields, which is why she also likes the passive SSGA SPDR S&P Euro Dividend Aristocrats ETF.
The fund aims to track the performance of certain high dividend yielding equities in the eurozone by following the performance of the S&P Euro High Yield Dividend Aristocrats index.
The index is designed to track the performance of the 40 highest yielding stocks in Europe – companies which have had increasing or stable dividends for at least 10 consecutive years.
Since launch in March 2012, the ETF has returned 36.58 per cent, slightly higher than the S&P index. As a point of comparison, the fund also beat the MSCI Europe index, which gained 28.99 per cent over the period, all while yielding 3.62 per cent.
Performance of fund vs indices since Mar 2012
Source: FE Analytics
Among the fund’s top holdings are Italian holding company Atlantia, which manage the bulk of toll roads across Europe, German multinational engineering and electronics company Siemens and Axel Springer, one of the largest publishing houses in Europe.
The fund has ongoing charges of just 0.3 per cent, making it significantly cheaper than any active portfolio in the sector.
F&C European Growth & Income
Though it does not have a pure income approach, Richards also like the five FE Crown rated F&C European Growth & Income fund, managed by Mark Nichols and David Moss.
The £392.5m fund aims to provide capital growth and a high level of income through investment in European equities. It does, however, have a relatively low yield of 0.8 per cent.
The fund has delivered strong numbers over the medium and long-term, though it has also trailed its peers over the last year.
Over the last five years, the fund has made76.26 per cent while the IMA Europe ex UK sector gained 69.99 per cent. Its benchmark, the FTSE Developed Europe ex UK index, made 68.24 per cent.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
Since the fund has a growth bias, it is slightly more volatile than the income-focused Standard Life fund, at 17.62 per cent over the last five years, though it is less volatile than its benchmark over the period.
Like the Standard Life fund, the managers also hold Roche and Novartis in their top-10 holdings, but are also backing insurers Allianz and AXA as well as Swiss bank Svenska Handelsbanken.
F&C European Growth & Income has ongoing charges of 0.82 per cent.
