3 Equity Income Funds

Morningstar analysts handpick three equity income funds that have a history of offering decent yields and growth too

Holly Black 13 April, 2021 | 11:34AM
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Equity income funds and investment trusts are a popular choice for investors looking to combine growth and income within their portfolios. These funds invest in dividend-paying stocks, achieving gains as the share price of the companies (hopefully) increase while also enjoying an income from the dividends paid out. Investors in such funds have an option to withdraw the income paid or to wrap it back up into their investment, which can help to further boost returns. Here, we look at a few highly rated options.

Rathbone Income

Morningstar analyst Bhavik Parekh describes the Rathbone Income fund as a “solid choice” for investors who want both long-term growth and a rising income. Many equity income funds were hit hard in 2020 as companies across the board cut their dividends because of the Covid-19 pandemic, but Rathbone Income made only a small cut to its own payout. The fund was upgraded in December from a Bronze to Silver Morningstar Analyst Rating. Manager Carl Stick has been at the helm since 2000 and Morningstar’s Parekh praises his ability to “identify quality companies with healthy dividend yields that can grow their payouts by at least the rate of inflation each year”.

Investors will recognise many of the British blue-chip names in the portfolio of this UK-focused fund including insurance firm Aviva (AV.A), mining giant Rio Tinto (RIO), and banking stalwart NatWest (NWG). While the fund was down 10.6% in 2020, it has made a strong start in 2021 as it is up 8.6% year to date. Over 10 years it has delivered annualised returns of 7.58% and it currently yields a healthy 3.47%.

M&G Global Dividend

Bronze-rated M&G Global Dividend has managed to increase its income payout for the past four years in a row – no mean feat given the tumult of the past 12 months. The fund’s global remit means it can seek dividends from companies across the globe and currently around 38% of its assets are in US firms, 20% in Canada, 15% in Europe, and 14% in UK stocks.

The fund is well diversified at a sector level too, with investments in the Healthcare, Consumer Defensive, and Basic Materials spaces each accounting for around 16% of assets. Top holdings currently include methanol producer Methanex (MX), Canadian natural gas producer Keyera (KEY), and tobacco giant Imperial Brands (IMB).

Morningstar analyst Jeffrey Schumacher rates the “experience and expertise” of lead manager Stuart Rhodes and its “close-knit” team. He adds: “The fund’s philosophy is to grow the absolute dividend distributed to investors by investing in stocks that can achieve above-average dividend growth.”

The fund yields 2.18% and has delivered annualised returns of 10.25% over the past decade. Worth noting, too, is that the fund’s parent company M&G announced fee reductions to a number of its funds earlier this year, which should benefit investors. M&G Global Dividend’s annual charge was reduced from 0.9% to 0.7%.

JPMorgan Global Emerging Markets (JEMI)

Investment trusts are often a good option for income seekers because they are allowed to keep some of their profits (up to 15%) in reserve each year to pay out to investors in leaner years. This set-up means investment trusts are far less likely to cut their dividend than open-ended funds – indeed, the Association of Investment Companies monitors a list of so-called Dividend Hero trusts which have managed to grow their dividend payout for at least 20 years in a row. Bronze-Rated JPMorgan Global Emerging Markets taps into the dividend growth on offer from companies in developing markets across the world including China, Taiwan, Russia and South Korea.

Morningstar analyst Lena Tsymbaluk explains: “This bottom-up, income-oriented strategy targets an overall dividend yield of 130% of that offered by the MSCI EM Index (which currently yields 1.85%). The portfolio is divided into three buckets depending on the dividend yield of the stock: around 60% of the portfolio is in firms that can growth their earnings and dividends, while the remainder is spread across high and low yielding names.”

The fund’s biggest weightings are to the technology and financial services sectors, which account for 37% and 30% of the portfolio respectively. Top holdings include computer chip-maker Taiwan Semiconductor (2330), insurance group Ping An (601318), and supermarket group Wal-Mart de Mexico (WALMEX).

Over the past year the trust has gained a hefty 56.78% and it has delivered annualised returns of 14.14% over five years. It yields 3.52%.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Holly Black  is Senior Editor, Morningstar.co.uk


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