Wednesday 10 August 2011

Good equity income fund for depressed markets?

Question
If the stock market falls to a realistic level it might be worth buying for income again. Can you recommend a fund that specialises in stocks with good yields and solid prospects for maintaining dividends?Answer
This is a good question, as equity income fund management styles do vary, with some funds more focussed on maintaining high dividend yields than others (which might look more at the big picture and growth).

Newton Higher Income is a good example of a fund that has very strict income constraints to ensure yields remain high - it only holds stocks with dividend yields 15% above the FTSE All Share average. This naturally steers the fund towards holding large, established companies that generate lots of cash and pay reliable dividends - current largest holdings include Glaxosmithkline, Royal Dutch Shell, HSBC, BP, BAT, Astrazenenca, Tesco and Vodafone.
While this rigid approach tends to underperform in fast rising markets, it may bode well during more difficult times.

Schroder Income Maximiser is interesting because the manager sells away some future potential upside to boost income, via what are called covered call options. This means the fund will probably lag rising markets but perform relatively well during flat periods. It invests in FTSE 100 stocks, currently with a bias towards the financials and healthcare sectors.

Looking at investment trusts, Murray Income might meet your criteria. It's a conservatively run portfolio that focuses on companies able to grow revenue, cash flow and dividends - over two thirds invested in FTSE 100 companies. The fund tends to trade in a narrow discount (to net asset value) band, which helps reduce the volatility that this aspect of investment trust investing can add. The TER is just over 1%.

If you prefer the concept of tracking then perhaps look at the iShares FTSE UK Dividend Plus ETF, which tracks the 50 highest yielding stocks (based on a 1 year forecast) within the FTSE 350 index (excluding investment trusts). The TER is just 0.4%. Because weightings are based on dividend yield rather than market cap there's usually a bias towards medium sized companies - around half the fund is currently invested in financials and utilities companies.

If anyone has other suggestions please post below, good luck making your decision.

Read this Q and A at http://www.candidmoney.com/questions/question551.aspx

No comments:

Post a Comment