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.
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.
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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.