Ask an investor which one out of equity income and fixed income could be relied upon the most to meet their income needs and many people would probably choose equity income.
There are some key differences between the way the two asset classes pay an income, which are worth advisers and especially clients understanding before they invest.
Matthew Yeates, investment manager at Seven Investment Management, says: “Income from equities comes from the share of profits paid out through dividends, after paying debt, versus the income from fixed income instruments from debt paid out before profits.
“All other things equal, over the long term, this should make income from debt less risky than that from equity as it is not contingent on companies making a profit.”
He warns though that the demand for income producing stocks though has made them expensive on many metrics.
“Although, traditionally, income-paying stocks have been associated with being value stocks, this is less obviously the case at present, with many bond proxies trading very expensively on traditional multiples.”
Nevertheless, UK equity income funds frequently top best-selling fund lists.
Equity income has become more popular than fixed income strategies in recent years as long-term real interest rates have fallen, points out Peter Elston, chief investment officer at Seneca Investment Managers.
He says: “25 years ago the real long-term gilt yield was 5 per cent, whereas today it is -1.5 per cent.
“We are finding good income opportunities in the mid-cap space in the UK, where there tends to be a growth kicker too.”
Dividend culture
It is also, in no small part, down to the UK’s strong dividend-paying culture.
Darius McDermott, managing director at FundCalibre, observes: “The current trend (one that has been in place for some years now) is that the yield on equities is higher than the yield on bonds.
“It has made equity income funds very attractive. The yield on the FTSE All Share [index] is about 3-4 per cent, for example.”
He notes: “In the UK we are lucky – we have a long-established culture of paying dividends so UK equity income managers have a wide choice and can pick and choose. There are a large number of companies paying a decent yield.”
But the dividend culture is improving in other regions now, giving investors more reason to diversify their income stream by investing in global equity income funds over regional equity income funds, Mr McDermott confirms.
This is backed up by net retail sales figures from the Investment Association (IA) which show the IA Global Equity Income sector has seen positive net retail sales in eight out of the past 13 months, peaking at £122m in June 2017.
Over the same period, the IA UK Equity Income sector registered net outflows in 11 months.
