In order to combine growth with income in a portfolio, investors tend to go for funds. Equity income funds allow those focused on income to withdraw dividends, while investors looking to maximise their investments can reinvest them to boost returns.
Income funds invest in dividend-paying stocks, which achieve gains as stocks' share prices (hopefully) increase. They also enjoy an income from any dividends paid out. There are numerous such funds available to UK investors. Our equity fund analyst Samuel Meakin has selected some of the funds we like best here at Morningstar, focusing on the UK, Europe and global markets.
UK – Artemis Income
This Silver-rated income strategy is a solid offering for those wanting a core exposure to UK equities with an above-market dividend yield. While its management team has experienced some minor changes over the past year, its approach has remained consistently focused on core, without any flexibility to invest in smaller companies.
We like the fund’s cornerstone focus on free cash flow with a good level of diversification. The fund aims to hold between 40 and 70 stocks--it currently holds 47, including Barclays (BARC), Anglo American (AAL) and London Stock Exchange Group (LSEG). It is overweight financial services (where it invests 26% of its assets) and communication services. Over the course of 2021 it has returned 14.28%, with a 3-year annualised return of 7.55%.
Europe – BGF European Equity Income
BlackRock’s income fund for European equities is well liked by Morningstar analysts for its dynamic approach, which is more style-agnostic than its peers. It aims to deliver at least 110% of its benchmark's yield, and it picks its stocks from the bottom up with a quality focus. Its managers (named Morningstar European Fund manager of the Year for European equities in 2018, though only one of the two managers still reside at the helm) aim to control risk by balancing stocks with a potential to grow their dividends with undervalued high-yield opportunities.
This approach has led to a dynamic exposure to sectors and industries over the year. Currently, the 42-stock portfolio is overweight industrials and healthcare. Over half of the portfolio has either a narrow or wide economic moat rating, although this does not apply to its two biggest holdings, EDP (EDP) and Enel (ENEL). This year, the fund has a return of 13.65% and its annualised return in the past three years is 12.28%.
Meakin highlights that there are fewer funds in the European market to choose from because equity income investing is not as big in Europe as in the UK. The fund also has a sibling, BlackRock Continental European Income, which excludes UK stocks and is also Bronze-rated.
Global – Trojan Global Income
Lastly, the Silver-rated Trojan Global Income is our top pick for global income. This fund also has a strong focus on quality, concentration and low turnover, with portfolio turnover averaging 10% per annum. This tilt, combined with a defensive stance, has helped the fund shine in rough markets as well. Morningstar also likes the fund managers, who share responsibility for finding and researching ideas.
Because of its concentrated portfolio (34 stocks in total), this fund's holdings stray quite far from peers in terms of sector exposure. For example, it has a 40% allocation to consumer staples, versus 14% for the rest of its category. Its biggest stocks are British American Tobacco (BATS), Philip Morris International (PM) and Unilever (ULVR), which all account for over 5% each of the portfolio. Notably, 90% of the portfolio has a moat rating, 80% of it wide. In 2021, it managed a 12.33% return, with a 3-year average of 9.78%.
