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Looking for income? I’d consider these funds that pay dividends

Investing in dividend-paying companies can be a great way to create a passive income. However, if you’re interested in building an income stream this way, you don’t necessarily have to invest in individual dividend stocks yourself as there are plenty of funds that pay dividends. These are often referred to as ‘equity income’ funds. With that in mind, here’s a look at three dividend-paying funds that I hold in high regard.

Vanguard FTSE UK Equity Income Index

If you’re looking for a combination of high yield and low fees, the Vanguard FTSE UK Equity Income Index (income class) could be worth a look. This is a passive fund that seeks to track the performance of the FTSE UK Equity Income Index – which consists of stocks listed on the London Stock Exchange’s main market that are expected to pay dividends that generally are higher than average. The yield here is currently a high 5.4% (yields will fluctuate) and the dividend is paid bi-annually. Top holdings currently include Unilever, AstraZeneca and GlaxoSmithKline.

One of the main advantages of this fund, aside from its high yield, is that fees are incredibly low at just 0.22% per year through Hargreaves Lansdown. That makes it a very cost-effective way to get exposure to dividend stocks. However, be aware that overall, this fund has underperformed the FTSE 100 over the last five years, returning around 20% versus 32% for the FTSE 100. Also bear in mind that passive funds such as this haven’t really been tested in a proper bear market, as most have been launched within the last decade.

Man GLG UK Income

One dividend-paying fund that has outperformed the FTSE 100 in recent years (by a wide margin) is the Man GLG UK Income fund (income class). This fund aims to achieve a level of income above the FTSE All-Share index together with some capital growth. It currently offers a yield of around 5.2% and dividends are paid monthly. Top holdings currently include Imperial Brands, British American Tobacco and BP.

The overall performance of this fund over the last five years has been excellent. The top-performing UK equity income fund on Hargreaves Lansdown over that time horizon, it has generated a total return of around 56%, outperforming the FTSE 100 by more than 20%. On the downside, fees are a little on the high side, at 0.9% per year through Hargreaves.

Franklin UK Rising Dividends

Finally, one of my favourite dividend-paying funds is the Franklin UK Rising Dividends Fund (income class).  The reason I like it is that the fund tends to focus on companies that are increasing their dividends, which, to my mind, is an excellent long-term investment strategy. The dividend yield on this fund is currently around 3.7%, with dividends paid bi-annually. Top holdings currently include Shell, Unilever and Diageo.

While the yield on this fund may be a little lower than the yields on offered on other equity income funds, the overall performance of this one has been good over the last five years, with a total return of around 43% – more than 10% higher than the FTSE 100. I’ll also point out that I’d expect the dividend payout here to grow at a healthy rate given the investment strategy. Available on the Hargreaves Lansdown platform with an annual fee of just 0.55%, I think this fund is a great choice for dividend investors.

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Edward Sheldon owns shares in Hargreaves Lansdown, Unilever, Diageo, Imperial Brands, GlaxoSmithKline and Royal Dutch Shell and has a position in the Franklin UK Rising Dividends fund. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline and Unilever. The Motley Fool UK has recommended AstraZeneca, Diageo, and Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.