There will be times during challenging economic and market conditions when dividend payment from the underlying stocks might be under threat.
David Holloway, marketing director of Rathbone Unit Trust Management, says a good manager will look to invest in companies who manage their dividend payment over time, not too high or two low.
He says managers should look for companies who avoid knee-jerk reactions from year-to-year, while also mindful of what is the appropriate amount of income that needs to be reinvested into the business for future growth.
In the main, Darius McDermott, managing director of Chelsea Financial Services, says UK equity income funds tend to underperform in strongly rising markets and outperform in falling markets.
Over the very long term, Mr McDermott says their total returns have been comparable with UK growth funds, as they benefit from the compounding of reinvested dividends.
He says: “As with all sectors though there are good and bad funds, and there is no hard and fast rule.”
But Ben Yearsley, head of investment research at Charles Stanley, says reinvesting dividends over time has made a huge difference to total return and over most time periods the equity income sector has been very hard to beat.
He says: “In strongly rising markets, the majority of equity income funds underperform say UK All Companies funds, however in flatter markets, the dividend yields and more conservatively run businesses help them outperform.
“However there is a recent trend of more aggressive, smaller company orientated equity income funds that will perform differently.”
