The FTSE 100 has suffered one of its most aggressive sell-offs since the financial crisis over the past two weeks. These declines have thrown up some fantastic bargains for long-term investors. Particularly, income-seeking investors.
Indeed, more than one-third of FTSE 100 constituents now support dividend yields of 5%. While some companies might not be able to sustain these distributions, others look entirely secure. As such, now could be the time for dividend investors to start snapping up some of these bargains.
FTSE 100 income
The problem is, it’s not very easy to distinguish which companies will be able to maintain their dividends and which ones won’t. With this being the case, an equity income fund, or FTSE 100 tracker, could be a better option for investors than buying stocks directly.
The great thing about an equity income fund is that it spreads the risk. Owning individual dividend stocks exposes investors to the risk of a dividend cut. If a company cuts its dividend without notice, the capital losses can exceed many years of income.
By spreading the risk, investors don’t have to worry about the prospect of a dividend cut. Buying n FTSE 100 tracker fund is an excellent way to create an income portfolio at the click of a button.
The index currently supports a dividend yield of 4.7%. That’s an average yield of all the companies in the index.
The one downside of owning the FTSE 100 index as an income investment is the fact that it has quite a lot of exposure to banks and commodity companies. The exposure to these two cyclical sectors makes the index quite volatile.
Equity Income Index Fund
Vanguard’s FTSE UK Equity Income Index Fund could be a better option. This fund aims to track the performance of the FTSE UK Equity Income Index.
It also has a fair bit of exposure to banks and miners, but around 10% of the fund is invested in pharmaceutical businesses, and there’s also a substantial weighting towards consumer goods companies, as well as utilities.
The fund owns 124 firms. It charges just 0.14% per annum in management fees and currently supports a dividend yield of 5.4%. So this could be a great way to boost your portfolio’s income stream at the click of a button.
In the current market environment, a diversified income fund such as the Vanguard equity income offering provides a layer of insulation against broader market turmoil as well.
Another benefit of using an FTSE 100 or income tracker fund rather than an active investment manager is that these funds only track indexes. The fund’s managers are not allowed to go off any buy other companies outside of the index.
As a result, there’s little-to-no risk of a Neil Woodford-style disaster where the manager moves outside of their mandate.
The bottom line
So, overall, if you’re looking for somewhere to invest your money in the current climate, and don’t know where to start, the Vanguard FTSE UK Equity Income Index Fund offers a market-beating dividend stream from a diversified basket of stocks at a low cost.
