There is nothing like an equity rally to excite investors. With the FTSE 100 having risen back above 6,700, interest is rife in UK equities.
Much of the interest centres around growth, buying up shares that are undervalued and hoping to make a profit. But at the other end of the scale is equity income investing – buying high-quality stocks that will pay a dividend and produce an income stream.
With bond prices becoming less attractive each day, investors are heading elsewhere in the hunt for income. The UK already has a strong track record of paying dividends and, with some signs that the economy is on the up, investors are looking for ways to tap into potentially increasing income streams.
What’s the appeal?
While bonds have been seen as a safe haven for many throughout the financial crisis, investors are starting to come back to equities, albeit without the confidence seen before 2007/8.
According to Phil Doel, manager of the F&C UK Equity Income fund, the popularity of UK equity income funds is down to a combination of the companies they hold starting to do ‘okay’ and other asset classes looking comparatively expensive.
The past two or three months have seen a move towards ‘bond proxies’, Mr Doel adds – good companies in defensive sectors with low volatility. Companies in the food, tobacco, beverages and household goods sectors with a 4 to 6 per cent top-line growth would fit this category, he says, particularly those with exposure to emerging markets.
Chris Murphy, manager of the Aviva Investors UK Equity Income fund, says “really dull, boring businesses” are good for equity income, such as utilities and coach companies.
“We are very much driven by cash-flow companies as it is cash-flow that pays all the bills,” he says. “It is what, in the end, pays the dividends.”
Choosing a combination of stocks is important as well, he adds. Some companies will be large and sturdy, with a low growth rate, but consistently paying a dividend. Others will have stronger growth and may not immediately pay significant income but hopefully will do so in the future. Mr Murphy cites Majestic Wine as an interesting growth case.
Keeping an eye on the macro factors affecting dividend payouts is also important, he adds. “Different companies have different lifecycles. We have to recognise that you can have companies that can be slightly distressed because of the macro. They might be paying a low dividend but that growth can come back.”
