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Why investors should consider UK Equity Income

Why investors should consider UK Equity Income

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Investing for income is a hugely popular strategy – particularly when times are financially tough and you’re wanting extra revenue streams to help pay the bills. One sector that could be worth considering is IA UK Equity Income as most funds in this area target a regular income and longer-term capital growth. 

Here we take a look at how this sector works, the types of companies that are favoured, and some investment funds that could be worth considering. 

What is UK equity income? 

IA UK Equity Income is a sector for funds investing in companies of all sizes that aim to pay sustainable and growing dividends to their shareholders. The overall objective of most portfolios in this area is to generate a rising income, as well as increasing the value of your original investment. The income generated can either be paid out to you – or reinvested back into the fund in the hope of enhancing its future growth potential. 

Who would it suit? 

A UK equity income fund could suit a variety of investors. For example, those needing an extra source of revenue to help pay the monthly bills when inflation rises. Others may be looking for an income stream that can help fund their child through university without tapping into existing savings. Of course, these funds can also be considered by those wanting to reinvest dividends and build a more substantial fund over time. 

What companies are favoured? 

Managers of UK equity income funds take different approaches. Some focus on well-established companies with long histories of paying dividends to investors. Others, meanwhile, look for smaller companies that they believe have the potential to become decent dividend-payers further down the line. As an aside, mining companies Glencore and Rio Tinto, oil giant Shell and bank HSBC Holdings were the top dividend payers in the third quarter of 2023*. 

Why consider a UK Equity Income fund? 

There are plenty of experienced, successful fund managers in the equity income space so potential investors will be spoiled for choice. Many of these individuals have very strong track records of finding exciting dividend paying opportunities, even within relatively dull markets. 

Equally, the prevailing market environment is likely to be more favourable to equity income strategies and the UK more broadly from here. There are still risks, but the UK market’s low valuations provide a significant cushion.  

So, where should you begin? To help kick off your research we’ve highlighted three potential UK Equity Income funds that could be worth considering. 

Three funds to consider 

GAM UK Equity Income 

This fund, which was launched in October 2017, invests in companies of all sizes – from the smallest names through to FTSE 100 giants. Its experienced manager, Adrian Gosden, believes that dividends are the most important driver of total returns. However, he can also invest in a company’s bond if it presents a better opportunity. 

We believe that the flexibility he has in running this fund is what makes it stand out in what has become a highly competitive sector. Drugs giant GlaxoSmithKline, oil major BP, and banking groups HSBC, Barclays and Lloyds are among its largest holdings**. 

Schroder Income 

Investing in companies valued at less than their true worth – and then waiting for a correction – is how this fund is managed. It has an emphasis on absolute return, meaning it seeks to balance dividend yield with dividend growth and balance sheet safety to achieve a growing income. 

While this process can lead to shorter periods of underperformance, the core discipline of buying cheap stocks has generated good long-term outperformance and a good income. HSBC, British Land and J Sainsbury are among the largest positions held by its managers, Andrew Evans and Kevin Murphy**. 

CT UK Equity Income 

Jeremy Smith, this fund’s experienced manager, searches for unloved companies that have the ability to sustainably grow their dividends. This fund has a patient, high-conviction approach that has proved to be extremely consistent over many years.  

The fund is unconstrained, meaning it can scour the market for ideas, and has a ‘contrarian value’ bias, with a focus on hidden gems and businesses with long term potential. The largest holdings include household names such as Unilever, AstraZeneca, Marks and Spencer Group and Legal & General Group**. 

*Source: UK Dividend Monitor, Q3 2023 

**Source: fund factsheet, 31 January 2024 

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and fund managers and do not constitute financial advice. 

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