The Motley Fool

£5k to invest? I’d buy this hands-free, low-cost income fund that yields 5%!

If you are looking for income stocks but don’t know where to start, one of the best ways to invest in the market, in my opinion, is with an income fund. 

Funds pool investors’ money, so by using one of these structures to invest, you can buy a diversified basket of stocks at the click of a button. It would be uneconomic to build the same kind of portfolio by yourself after factoring in taxes and commissions. 

High-profile failure 

However, the Neil Woodford scandal has brought to light the risks of entrusting your money to one fund manager. Blow-ups like Woodford’s are very rare, but most fund managers indeed underperform their investment benchmarks over the long term.

High fees don’t help their performance either. Something Woodford was praised for when he started was his low fee ratio. He was charging around 0.75% to manage investors’ money. Some other funds charge more than double that. 

Considering all of the above, if you want to invest in a UK equity income fund that doesn’t charge high fees, and has virtually no risk of a blow-up, then I think the FTSE UK Equity Income Index Fund from Vanguard could be worth your research time. 

A passive offering

The Vanguard fund is a passive offering that aims to track the performance of the FTSE UK Equity Income Index.

As a passive tracker, all the fund does is buy the constituents of the underlying index and sits on them. There’s no investment team or manager making decisions. All the fund is designed to do is mimic the underlying index. 

The one big drawback of this strategy is the fact that the fund won’t produce stunning outperformance. But, on the other hand, it won’t underperform either.

Once fees are taken into account, over the past decade the fund has returned 7.8% per annum, compared to 8% for its benchmark – that includes dividends. 

Low-cost, higher returns

At the time of writing, the fund charges just 0.22% in annual management fees. However, Vanguard is owned by its investors and the more money that flows into the business, the lower the fees go. So, I wouldn’t rule out a decline in charges over the next few years. 

The Equity Income Index Fund has 128 companies in its portfolio, with an average price-to-earnings ratio of 12.6. The largest holding is AstraZeneca, closely followed by GlaxoSmithKline. At the time of writing, the fund offers a dividend yield of 5.4% with the dividend paid twice a year. 

All in all, I think the Equity Income Index Fund is a great way to invest in income stocks without having to do any leg work yourself.

 The low charges and passive nature of the fund should mean that you can keep more of your hard-earned money rather than paying excessive fees to a manager who underperforms. 

A top income share with a juicy 6% forecast dividend yield

Income-seeking investors like you won’t want to miss out on this timely opportunity…

Here’s your chance to discover exactly what has got our Motley Fool UK analyst all fired up about this out-of-favour business that’s throwing off gobs of cash!

But here’s the really exciting part…

Our analyst is predicting there’s potential for this company’s market value to soar by at least 50% over the next few years...

He even anticipates that the dividend could grow nicely too — as this much-loved household brand continues to rapidly expand its online business — and reinvent itself for the digital age.

With shares still changing hands at what he believes is an undemanding valuation, now could be the ideal time for patient, income-seeking investors to start building a long-term holding.

Click here to claim your copy of this special report now — and we’ll tell you the name of this Top Income Share… free of charge!

Rupert Hargreaves owns the FTSE UK Equity Income Index Fund. The Motley Fool UK owns shares of and has recommended GlaxoSmithKline. The Motley Fool UK has recommended AstraZeneca. 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.