Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
These are tough times for income seekers. One of the worst quarterly performances by government bonds in the past 40 years has prompted a debate about the future for fixed income and the role that it plays in a balanced portfolio, while last year’s volatility forced many dividend-paying shares to cancel their payments.
But whereas the case for bonds looks increasingly unsettled, dividends appear to be bouncing back. Many companies have begun to reinstate their dividend, and more are likely to follow in their footsteps as the economic recovery gathers pace. For one step up on the risk ladder, the income available from shares is looking tempting to many bond investors.
Still, this remains a tricky landscape to navigate. Many investors may not know what to look for when it comes to equity income investing. That’s where an equity income fund can come in handy, which is designed to navigate the world of dividend-paying shares on your behalf.
Our Select 50 list of favourite investments features four funds which aim specifically to provide investors with equity-derived income. Between them, these funds cover a number of regions and investment styles. In this article, we look at each in turn and how they could fit within your portfolio.
Fidelity Global Dividend
The Fidelity Global Dividend Fund is managed by Dan Roberts, who has more than 15 years’ experience as an equity income portfolio manager to his name.
The aim of the fund is to achieve income and long-term capital growth from a portfolio consisting primarily of company shares from around the world.
Roberts’ approach focuses on identifying good-quality companies with attractive valuations which can thrive under a wide range of economic scenarios. Most of all he wants stable companies, which pay well-covered dividends, while avoiding those with unsustainable dividends. Downside protection - thinking about what could go wrong - is just as important to this manager as a stock’s potential upsides.
The fund’s global remit means the manager is able to look across the globe for companies that suit his approach. At present, the fund has its largest geographical exposure to the US, which accounts for 33.2% of the portfolio. Europe and the UK are close behind, at 29.9% and 13%, respectively.
The portfolio is similarly diversified across industries. Typical defensive sectors like consumer staples and healthcare count for over 25% of the portfolio between them, while large technology dividend payers like Samsung, Cisco and Intel also feature within the fund’s top 10 holdings.
Given the fund’s focus on downside protection, this could be a good one for more cautious investors looking for stability in times of market distress.
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Invesco Global Equity
Carrying on the global theme is the Invesco Global Equity Fund. Portfolio manager Stephen Anness draws on the expertise of Invesco’s regional equity analysts and compiles the “best ideas” into this fund’s global portfolio.
The manager works via a ‘total return’ approach, aiming to provide investors with a blend of above average income as well as capital growth. He’s particularly attracted to strong, cash-generative businesses, offering above average dividend yields and sustainable business models.
The portfolio consists of three different types of business. Comprising the majority of holdings will be “dividend compounders” - companies that have a strong track record of paying and growing dividends. Taking up around 20% of the portfolio will be lower yielding, but faster growing companies, in which the manager sees the opportunity for meaningful dividend and capital growth. Finally, occupying only a small fraction of the portfolio, are “dividend restoration ideas” - companies that are undergoing a temporary challenge or turnaround, but where the manager sees a clear route to dividend restoration.
This is another fund which won’t necessarily offer a “core” asset exposure - i.e. one that represents the market overall - but may overlap with value funds. Matching it with a growth or core fund could work well for investors looking for broad income exposure.
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Franklin UK Equity Income
The Franklin UK Equity Income Fund focuses in on the UK market, which is well known for providing a home to some of the world’s largest and most reliable dividend payers.
The fund is managed by Colin Morton, with the help of a close-knit team based in Leeds. Morton’s focus is on companies where the dividend is not just high compared to the market, but sustainable and likely to grow. His team is keen to understand the underlying operations of a business, which they feel is crucial in assessing its ability to pay an income.
The fund tends to focus on large cap companies, and could work well for investors looking for core exposure to some of the UK’s best-established dividend payers.
The fund’s top 10 list of holdings reads like a who’s who of such names. Unilever currently takes the top spot, a classic defensive stock market darling. Below that you’ll find the oil giants Royal Dutch Shell and BP - both of whom were forced to cut their dividend last year, but have recently reinstated payments, albeit at a lower rate - as well as some of the UK’s highest yielders like British American Tobacco.
Those core assets are spread across sectors and styles, meaning the fund has proven resilient in the face of market unrest in the past. Still, the fund looks to deliver greater income than the FTSE All-Share index over three-five years, making this a good choice for investors looking for both reliable and meaningful levels of income.
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JPM US Equity Income
The JPM US Equity Income Fund is managed by Clare Hart, a seasoned professional with more than 20 years’ investment experience, who heads JPM’s US Equity Income process.
Her fund prioritises companies’ quality above everything else, and stocks which don’t meet its high standards won’t find a place in the portfolio.
This isn’t the highest-yielding fund, and it doesn’t aim to be. Rather, the manager prioritises consistency of earnings over excess. Every company she invests in must yield above 2%. Beyond that, her investment process focuses on three tenets.
First, she looks at a company’s management teams and the decisions they make. Primarily she’s interested in teams which reinvest for the future and ensure consistent rather than excess income. Then she considers the financials, preferring companies that are conservative in their capital practices. Finally, she’s looking to the quality of the business. She’s after sustained income-producers - for that, she knows a company must have an appealing model to keep it ahead of the competition.
With its focus on quality and valuation - Hart won’t pursue quality at any price - this fund is more on the conservative side, but should provide investors with a steady ride through periods of volatility. Given the troubles income seekers have faced in recent months, that may come as welcome relief.
More on JPM US Equity Income Fund
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Select 50 is not a personal recommendation to buy or sell a fund. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. The Franklin UK Equity Income Fund invests in a relatively small number of companies and so may carry more risk than funds that are more diversified. The Fidelity Global Dividend Fund and Invesco Global Equity Income Fund use financial derivative instruments for investment purposes, which may expose the funds to a higher degree of risk and can cause investments to experience larger than average price fluctuations. The Fidelity Global Dividend Fund also uses currency hedging to substantially reduce the effect of currency exchange rate fluctuations on undesired currency exposures. There can be no assurance that the currency hedging employed will be successful. Hedging also has the effect of limiting the potential for currency gains to be made. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.
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