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BLOG: Are UK equity income funds worth considering today?

Paloma Kubiak
Written By:
Paloma Kubiak
Posted:
Updated:
20/10/2022

These are financially devastating times for millions of people. Inflation is running at an eye-watering 10.1%, the cost of everything is soaring, interest rates are at 2.25% and average mortgage rates are now in excess of 6%.

The fact is that things are unlikely to get financially easier in the short-term. That’s why it’s vital to squeeze every last drop out of your investments – and pick the best funds to make this possible.

Outflows from equities

Of course, stock markets have had a torrid year due to global political and economic uncertainty. It’s unsurprising, therefore, that investors have taken billions of pounds from their investments.

Data from Morningstar has revealed that investors pulled £11.3bn from UK-domiciled open-ended funds and ETFs in September, the largest number in more than a decade. Equity funds bore the brunt of the redemptions.

However, that doesn’t mean equities should be ignored completely. Investing is all about the longer-term and there are plenty of funds that can play a beneficial role in your overall portfolio.

A prime example is equity income funds. These have long been favoured by investors looking to add an extra revenue stream to their overall finances – particularly helpful when money is tight.

These funds invest in companies of all sizes that aim to pay a sustainable and growing income to their shareholders in the form of dividends.

These dividends can either be taken as a source of income or reinvested to make the most of compounding returns.

Outlook for dividends

Obviously, a key ingredient in the performance of equity income funds is whether the companies they invest in are actually paying decent dividends.

The good news is that UK dividends soared in the second quarter of this year – boosted by the weak pound – according to research by the Link Group, which is also optimistic about future prospects. In fact, it expects headline pay-outs to rise 2.4% in 2022, while underlying pay-outs, which exclude special dividends, should soar 12.5%.

The latest Global Dividend report from Janus Henderson was just as optimistic. It revealed that global dividends also surged in the second quarter, jumping 11.3%.

“Despite the enormous economic disruption the pandemic caused, global dividends are above their pre-pandemic high and now just 2.3% below their long-term trend level,” it stated. “Moreover, without the exceptional strength of the US dollar, payouts would be entirely back to trend.”

Funds to consider

If you’re keen on equity income then we have a few funds that could be worth considering.

The Artemis Income fund is a flexible, high-conviction portfolio of UK stocks, run by a very experienced management team. The fund, which typically holds between 50 and 70 stocks, has a bias towards large-cap equities, such as AstraZeneca, Anglo American and the London Stock Exchange.

Rathbone Income invests in UK companies of all shapes and sizes and gives investors exposure to a concentrated portfolio of companies with high quality and visible earnings. The fund also has one of the best track records among its peers for consistently growing its own dividend.

If you prefer to diversify your investments more, Trojan Global Income fund may be worth a look. Manager James Harries is exceptionally experienced, and the fund has historically done an excellent job of preserving capital in difficult markets.

TM Redwheel Global Equity Income is another option. While the fund itself may be new, the team is highly experienced, and the investment strategy is well-proven. It has a true contrarian nature backed up by a logical and disciplined philosophy. This leads to an attractively yielding income fund.

Darius McDermott is managing director at Chelsea Financial Services and FundCalibre