UK Equity Income (2024)

Most funds in this sector aim to generate a rising income, as well as increase the value of your original investment over the long term. Any income can be paid out to you as cash or reinvested back into the fund to help boost long-term growth.

Different fund managers take different approaches to income investing. Some focus on larger companies that are seen to be more stable and have paid regular dividends for many years. Others invest in higher-risk small and medium-sized companies. These might pay a lower income to start with but can have more dividend growth potential. Some managers also use their ability to invest up to 20% of the fund overseas to add diversification and allow exposure to sectors and industries less available in the UK equity market.

Our view on the UK Equity Income sector

Investing in a dividend-paying company can mean your income and capital grows as the company grows. The best companies will grow their profits and dividends over the long term, though not all companies' profits – and therefore their dividends – are sustainable. The extraordinary events of 2020 provided a particularly harsh lesson in this regard as the effects of the COVID-19 pandemic severely impacted upon many companies' ability or willingness to pay dividends.

In general, however, we like equity income funds as an expert fund manager invests in a range of companies reducing the impact if one gets into trouble. It's less risky and more convenient than trying to choose individual shares yourself.

Given inflation in the UK is elevated above the Bank of England’s 2% target at the moment it’s likely we’ll see more rate rises in the coming months. In practice the impact of inflation on earnings will vary by economic sector. Companies that pass on higher input costs to end consumers can preserve or grow their earnings and distribute the excess in dividends if they wish.

Dividends are clearly important for investors who require income, but an equity income fund can also be relevant for those seeking capital growth. If not required now, dividends can be reinvested to increase the number of shares held, from which more dividends can be taken at a later date. Repeating this process over a long period (known as compounding) is a way to grow capital, though there are no guarantees.

We think equity income funds can provide an important element of almost any investment portfolio. Reinvesting dividends when you don't need the income could potentially help your pot grow at a faster rate. However, investments and their income will go up and down in value, so you could get back less than you invest.

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