For some more hands-on investors, selecting individual shares is the preferred option. However, unless you are confident choosing your own companies and have a sufficiently large portfolio to provide diversification, I believe using equity income funds is a sensible choice. Funds typically contain exposure to 40 to 60 individual shares, so you can spread your risk even with a modestly sized investment. However, it is still worth considering investing in a few funds rather than just one. There are many choices in this popular sector – nearly 100 UK funds plus those investing in high-yielding shares overseas, both regionally and worldwide.
Some are naturally more defensive, others more aggressive, perhaps including higher risk smaller firms. I like to dovetail different styles together to create a well-rounded portfolio that is not facing in the same direction – plus it can mean you spread out income payments across more months of the year.
Here are four equity income funds from our recommended listed, representing different strategies and styles. I believe they are all worth considering when constructing an equity income portfolio.
Trojan Income
Since launch in 2004, manager Francis Brooke has aimed to increase both capital and income over the long-term while controlling volatility. He is naturally attracted to more defensive, predictable companies that are capable of gradually raising their dividend despite what the wider economy is doing.
It can mean investing in somewhat dull, boring businesses, but over the long-term it has been a fruitful strategy.
Performance of fund vs sector and index over 5yrs
Source: FE Analytics
Brooke has increased the fund's dividend each year and the fund has stood up well to market volatility – although past performance is no guarantee of future performance.
JOHCM UK Equity Income
Clive Beagles has been successfully managing equity income funds for a long time. His fund tends to be at the racier end of the sector in terms of positioning, with significant exposure to more economically sensitive areas such as retail and construction.
Performance of fund vs sector and index since launch
Source: FE Analytics
However, his long-term record is superb and although it might be a bumpier ride, I believe it is well worth considering for the spicier part of an equity income portfolio.
First State Global Listed Infrastructure
Whilst not a traditional form of equity income investing, infrastructure assets share many of the same characteristics as dividend-paying stocks, chiefly a high income from stable cash-flows, often linked to inflation.
Managed by Peter Meany and Andrew Greenup, this fund could provide diversification to conventional UK funds, although its yield does not tend to be as high.
Performance of fund vs sector over 5yrs
Source: FE Analytics
According to FE data, the fund is currently yielding 3.18 per cent, but its total return record on a risk-adjusted basis versus the IMA Global sector has been strong.
M&G Global Dividend
Manager Stuart Rhodes aims to buy tomorrow's rather than today's high yielders. He is a strong believer that dividend growth drives share price growth and that better overall returns are available from modest yielders increasing their dividends quickly.
At times, therefore, it may yield less than more mainstream equity income funds; however, the lack of a dividend target, plus the fact this is a global fund, affords Rhodes a great deal of flexibility. I believe it could benefit a portfolio both in terms of diversification and long-term returns.
Performance of fund vs sector and index since launch
Source: FE Analytics
FE data shows that fund has significantly outperformed both the IMA Global and IMA Global Equity Income sector averages since its launch in July 2008, as well as its MSCI AC World index benchmark.
With the exception of Trojan Income, all of the funds mentioned above are open to new investors, although Brooke’s portfolio is itself available via certain platforms.
In a recent FE Trustnet article, industry experts predicted that equity income will remain the asset class of choice for investors, as a result of shifts in the world’s demographics.
