While dividend income is typically generated by investing in individual stocks, it can also be obtained by investing in funds. Today, there are many equity funds aiming to provide income for investors.
Here, I’m going to highlight three with a focus on dividends. If my goal was to generate income, I’d certainly consider these products.
High-yield FTSE stocks
Let’s start with the Vanguard FTSE UK Equity Income Index. This is a passively-managed product that provides exposure to a basket of higher-yielding FTSE stocks. Names in the portfolio currently include Rio Tinto, Glencore and BP.
There are a number of things to like about this fund. One is the high yield on offer. Currently, the historic yield is about 4.9%. Another is the low fee. Through Hargreaves Lansdown, net ongoing charges are just 0.14% (plus platform fees).
On the downside though, total returns (capital gains plus dividends) over the long term haven’t been that flash. Over one year, the fund has returned -1%, while over five years it has returned 23% (versus around 28% for the FTSE 100 index).
My view on this fund is that it’s well suited to those prioritising a high level of income who are not too concerned about total returns.
Growing income
Those who do care about total returns may want to check out the FTF Martin Currie UK Rising Dividends fund.
This product – which aims to generate a growing level of income together with investment growth – has a better overall performance track record than the Vanguard product. Over one year, it has returned about 7% while over five years, it has returned about 37%.
What I like about this fund is that it has more of a focus on higher quality companies. Stocks it owns include Unilever, Diageo and AstraZeneca. History shows that investing in high-quality businesses tends to produce excellent returns, over time.
One downside however, is that the yield on offer is not that high. Currently, the historic yield here is about 2.8%.
Overall though, I think this fund could play a valuable role in a diversified income portfolio. Fees are relatively low at 0.54% a year through Hargreaves Lansdown.
Global dividends
The last dividend fund I want to highlight is the Morgan Stanley Global Brands Equity Income.
This is a global equity product that aims to generate income and growth by investing in companies with strong brands. Some names in the portfolio include Microsoft, Reckitt and Visa.
The fund appears to offer the winning combination of a healthy yield and strong long-term performance.
Currently, the historic yield is about 3.7%. As for performance, the fund has returned 3% over a year and 67% over five.
The downside to this product is that fees are a little on the high side. Currently, the net ongoing charge is 1% with Hargreaves Lansdown.
But I can justify the higher fee, given the performance track record.
