This is according to Dominic Rossi (pictured) and Andrew Wells, both chief investment officers at Fidelity. Rossi and Wells, who head up the equity and fixed interest teams respectively, think the dependability of equity income offers better value than the majority of the bond market. "I’ve been banging on about the importance of equity income as an asset class for the past 18 months now," Rossi said.
"I continue to believe it is the way forward as what we are seeing across the board is that there is a thirst for both income and a low-volatility strategy; equity income answers this question."
Rossi thinks next year will be a particularly fruitful year for the asset class, as a number of major UK and European companies will be able to increase their yields and provide special dividends.
"A lot of strong European corporates now have strong balance sheets and a low pay-out ratio, and are typically yielding between 3.5 and 4.5 per cent," he continued.
"I don’t just expect their dividends to hold their own, but actually increase in 2013."
Rossi says that investors who previously favoured fixed income should now seriously consider equity income because the asset class generally yields a larger amount and is far more attractive on a risk/reward basis.
He commented: "Equity income yields continue to grow and now they are over twice those of the majority of government bonds and very close to those of their high yield bonds."
"Quantitative easing will continue next year as central banks continue to increase their balance sheets, so developed-market government bonds will continue to offer investors negative real yield."
"So I think that the case for equity income is stronger now than when I began banging on about it a year and a half ago," he added.
When it comes to volatility, Rossi argues that equity income can now be considered an equivalent to high yield bonds.
"The volatility of equity income has shown its colours recently," he said. "It has been beaten down and is now more closely aligned to that of high yield bonds."
"I am positive that we will see fresh inflows continuing well into next year," he added.
Over a five-year period, the IMA UK Equity Income sector has an annualised volatility of 16.32 per cent, compared with 12.56 per cent from IMA Sterling High Yield. Over one year, the figures are 8.43 and 5.61 per cent respectively.
Rossi’s views echo those of Threadneedles’s Mark Burgess, who said in a recent FE Trustnet article that income-seeking investors should avoid the bond market in 2013 and gain exposure to defensive dividend-paying equities instead.
Wells, a specialist in the bond market, also agrees with Rossi. He says that the risks with equity income are higher than for fixed income assets, but that it is a better way for investors to protect themselves against inflation.
"I often look at equity income as a lot like corporate high yield bonds as an asset class. Although the capital risks are higher, equity income has a very good inflation hedge to it compared to high yield bonds," he commented.
"In my opinion, equity income is one along the risk scale from high yield bonds for investors."
"I think Dominic [Rossi] is right when he says investors should concentrate on high quality corporates, as they will continue to be popular and provide income-generative shares for the foreseeable future," Wells added.
Fidelity runs three equity income funds; Fidelity Enhanced Income and Fidelity Moneybuilder Dividend, headed up by FE Alpha Manager Michael Clark, and Fidelity Global Dividend.