A guide to investing in UK equity income funds
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A guide to investing in UK equity income funds.
People invest for a variety of reasons. Some will be focused on building as big a pot of money as possible. Others may need to generate an income in order to supplement other regular payments they’re receiving.
Investments that can produce an income include bank savings accounts, company dividends, bonds, investment funds, buy-to-let property, and annuities. This guide is all about investing in company dividends via UK equity income funds.
What are dividends?
Dividends are sums of money paid to shareholders by companies out of their profits. Why would a company do this? Because paying dividends can make shareholders more loyal and likely to stick with companies through tough periods. Paying dividends is also seen as a show of faith by a company in its future prospects. Not all companies will pay a dividend, but an increasing number do.
Why should I invest in UK companies?
UK companies have a very strong dividend-paying history, and you can often get a dividend yield of more than 4% from the UK stock market. That’s pretty attractive, especially when you could also be getting capital gains on your investment too.
However, it can be quite risky investing in the shares of just a handful of companies. What happens if one or more stop paying their dividend, or their share prices fall dramatically? You could find yourself out of pocket very quickly. This is why UK equity income funds are so popular.
What is a UK equity income fund?
A UK equity income fund pools together the money from lots of people and invests it in the shares of lots of different British companies. The fund will then amalgamate the dividends it receives into a single income payment. This may be paid monthly, quarterly, half-yearly or even annually.
What are the benefits of investing in a UK equity income fund?
The managers of these funds invest in what they consider to be the best companies paying sustainable and/or growing dividends. This means you get the benefit of a portfolio of companies in a single purchase.
The primary advantage of investing in these funds is the potential for a regular income stream. But you also have the potential for capital growth. This is because investors can benefit from long-term growth as the share prices of these companies hopefully increase in value too.
By investing in a fund, you also get diversification across a range of sectors and companies, which can help reduce the impact of individual stock volatility on the overall portfolio.
What are the risks of investing in a UK equity income fund?
Like any investment in equities, UK equity income funds are subject to market volatility. Fluctuations in stock prices can impact a fund’s performance, both in terms of income generation and capital appreciation.
Another consideration is that dividends are not guaranteed. Companies can suddenly cut their dividends or stop them completely. How much is paid out in dividends can vary. This means the income you receive from a UK equity income fund can also fluctuate.
Are there any other considerations?
It’s a good idea to evaluate the track record and expertise of a fund manager before you invest. You should also look to see if the manager is targeting companies with big dividend payouts, growing dividend, or a combination. There is no right or wrong, but you need to make sure their process is aligned with your own needs.
You should also consider the fees and charges associated with a fund because they can affect overall returns.
One final consideration is that of equity income investment trusts. They are similar to funds in that they pool investor money, but they have a different structure – they are listed and traded on the stock market. They are known as ‘closed-ended’ because there will only ever be a set number of shares available to buy, irrespective of the demand.
One of the benefits of trusts include is being able to hold back some of the income generated in good years to pay out when times are tougher. This makes returns smoother for investors.
Next steps
Wondering what to do next? Start by researching some UK equity income products. The City of London Investment Trust is a good place to start. It has increased its dividend every year since 1967! Another investment trust with a strong track record of consistently growing its dividend is Schroder Income Growth.
If you prefer a fund, Janus Henderson UK Responsible Income might appeal to people wanting to invest more sustainably, or IFSL Marlborough Multi Cap Income might take your fancy if you like investing in small and medium sized companies as well as large ones. There are plenty of good funds on offer, so take a look now.
