If there is one certainty in the investment world, it is that people still go crazy for equity income. This sector has traditionally attracted massive investor inflows and lured some of the biggest name fund managers. The combination of progressive income and capital growth from established blue-chip companies is hard to beat. Almost every investor needs some exposure. How do you get yours?
We can be heroes
In both February and March, equity income was the second-best selling sector among private investors, according to figures from the Investment Management Association. In April, it was ranked third with £342m more money invested than withdrawn, beaten only by the “Targeted absolute return” and “Global” sectors. Equity income isn’t always the top-selling sector, but it is never far off.
The profile of equity has of course been raised by the efforts of one man: dividend hero Neil Woodford, formerly of Invesco-Perpetual, where he famously turned a £10,000 investment into £140,000 over 20 years. His new vehicle, CF Woodford Equity Income, launched two years ago, has continued where this left off, with index-thrashing performance. No wonder this is the top-selling investment fund right now, according to new figures from The Share Centre. Investors trust Neil Woodford, making him the go-to man in troubled times like these.
The hunt for income
Woodford’s former vehicle, Invesco-Perpetual High Income, also featured in The Share Centre’s top 10 traded funds for May. Over five years, the fund has returned 67%, according to Trustnet. Another equity income favourite, JPM US Equity Income, also features and deservedly so, having grown 99% over the last five years.
Investors are increasingly looking further afield for their income, and not just in the US: you can also find global, European and emerging market equity income funds. But the UK is the traditional starting point, and unsurprisingly so, given the large number of income smashers on the market.
Yield to these yields
Now is an astonishing time to be investing for income in the UK, with a host of household big-name stocks yielding between 5% and 8% a year. That would be incredible at any time, but especially today, given that base rates have been stuck at 0.5% for more than seven years, and could easily stay there another seven. This means you can get a return up to 15 times base rate. If interest rates were closer to their traditional average of around 5%, a stock would have to yield 75% a year to give such a base-rate busting return. We can dream.
Today, oil giants BP and Royal Dutch Shell are yielding 7.42% and 7.26% respectively. HSBC Holdings beats them both, yielding 7.73%. British Gas owner Centrica, Scottish & Southern Energy, Legal & General Group, GlaxoSmithKline, Marks & Spencer, Vodafone and others all offer crazy generous yields of between 5% and 6%. While no dividend is guaranteed, and a number of companies have cut theirs lately, notably in the struggling mining and supermarket sectors, these are incredible rates of return. Also, they offer the prospect of rising income, a successful companies look to increase their payout year after year.
So there are good reasons to be crazy for dividend income, especially given the poor returns on cash and bonds, and Chancellor George Osborne’s tax crackdown on buy-to-let. You can buy a fund if you like, or save on manager fees by building a balanced portfolio of your own dividend winners.
