Equity income strategies focus on companies that pay a dividend to shareholders. Companies that prioritise dividend payouts tend to be more established and stable companies, with steady profits. Therefore an equity income strategy will often prove more resilient in falling markets, though it may lag a rapidly rising market.
Equity income investing brings its own valuation discipline. The income yield on any stock is expressed as a percentage of the share price. If the price rises, income falls if the dividends do not rise in tandem. So investors are unlikely to buy companies that are very expensive because the income would be low.
In general fund managers are striving to find those companies where the dividend is high, stable and secure. Some strategies will emphasise those companies paying a growing dividend that can keep pace with inflation; others will seek a high absolute dividend.
These are common themes among the 11 Rated Funds in our core selection. Income strategies also focus on small companies. Such funds can be found among our seven adventurous choices. Investors seeking income should ensure they have exposure to UK funds, because it limits the risk of adverse currency movements.
Five of our choices are investment trusts that can use reserves to smooth income payments. This can be reassuring for investors who withdraw income, but also for growth-oriented investors, because dividends reinvested over the years can have a powerful compounding effect.