Equity income funds are popular with UK investors and for good reason. These funds aim to provide investors with both capital gains and income – a winning combination when it comes to wealth creation.
Recently, I spent some time looking for the best equity income funds for my ISA this year. My goal was to find funds that have beaten the market in the past and have healthy dividend yields at present. Below, I’ll highlight two funds I like. I’d be happy to buy both for my portfolio this year.
A top equity income fund for 2022
The first fund I want to highlight is TB Evenlode Income. Its aim is to deliver a combination of healthy, growing dividends, and attractive capital returns (over rolling periods of five years). There’s an ‘accumulation’ version of the fund for those who want to reinvest their income, and an ‘income’ version for those seeking passive income.
What I like about this fund is that it has a focus on high-quality, Warren Buffett-style companies. Unlike a lot of other equity income funds, it tends to steer clear of high-yielding, cyclical stocks (which usually experience boom and bust cycles). This investment approach has worked well in the past. Over the last five years, the fund has returned about 38%, versus around 25% for the FTSE All Share index, and 24% for the FTSE 100 index.
The downside to this approach is that there are going to be periods when the fund underperforms the market. For example, this year it has underperformed a little because it doesn’t have any exposure to oil stocks.
Another risk to consider is that stock-specific risk is quite high. Looking at the most recent factsheet, I can see that at the end of February, 8.3% of the fund was invested in Diageo and 8.1% was invested in Unilever. If these stocks were to underperform, it could have a significant impact on overall performance.
I’m comfortable with the approach here, however. All things considered, I think this is a top choice for an investor like myself seeking capital gains and income. The historic yield is 2.5% and ongoing charges are 0.87% through Hargreaves Lansdown.
Rising dividends
Another top equity income fund I like is FTF Franklin UK Rising Dividends. This aims to beat the FTSE All-Share index over a three-to-five-year period by generating a growing level of income as well as investment growth. It also has accumulation and income options.
This fund is a little more diversified in nature than Evenlode’s income fund. It still has plenty of exposure to high-quality businesses (Unilever, Diageo, and Relx are in the top 10 holdings). However, it has a bit more exposure to cyclical businesses. Oil giant Shell and housebuilder Bellway are some examples here.
As for its performance, this fund has comfortably beaten the FTSE All-Share and the FTSE 100 indexes over the last five years, returning about 29%. That’s a solid return for a UK-focused equity income fund. As always though, past performance is not an indicator of future performance. Going forward, there’s no guarantee it will outperform the market.
Yet with a historic yield of about 2.8% and ongoing charges of a low 0.54% (through Hargreaves Lansdown), I see a lot of appeal in this fund. I think it could be a solid portfolio holding for me within my ISA.
