/ INCOME /
W hen it comes to
hunting for income from equities , there is a natural perception that the best way to obtain it is from a portfolio of actively managed funds . This would traditionally mean the IA UK Equity Income sector , or going further-a-field and investing in more globally orientated portfolios , such as those with significant exposure to Europe , the US or Asia .
One avenue investors may not have thought of going down is the passive route . While index tracking funds are generally considered cheaper alternatives for gaining access to the market , they are not widely known for their income-producing prowess .
Hargreaves Lansdown ’ s head of passives Adam Laird says the perception that tracker funds aren ’ t suitable for income investors is based on two myths : that these products do not yield anything and that only active managers can build income indices .
“ Both of these perceptions are false ,” said Laird . “ When we quote the FTSE 100 as standing at 6,000 , this does not factor in dividends , but index tracker funds do receive income . Also , investors now have a number of options available to them as the index investing space has evolved over the past decade .”
For anyone considering the
“ There is a risk there will be dividend cuts , but on the other hand the active managers do not always get it right ”
passive route , Laird says there are two options : using plain vanilla index trackers or ETFs , or taking more of a hybrid approach and using smart beta products .
Taking the more traditional route , he says investing in a FTSE 100 tracker does have income appeal . “ The FTSE 100 index holds the biggest companies in the market and many of these are high dividend producers ,” Laird explained . “ The index has a track record of being consistent with its yields , coming in at around 3.5 per cent for most of the last decade and currently standing higher at 3.9 per cent .”
He highlighted two funds to use for this purpose : the L & G UK 100 Index Trust and , for ETF exposure , the iShares Core FTSE 100 . “ The
L & G fund takes a simple approach of holding all the stocks in the index and carries a low charge of under 0.1 per cent ,” he said .
“ The iShares ETF , meanwhile , is the oldest on the London Stock Exchange and is again a simple product and has a fee of just 0.07 per cent .”
When investing in a tracker fund for income purposes over a more actively run fund , Laird concedes it is important to remember you are investing in the whole market . This means you are getting exposure to those companies that are cutting their dividends , of which there have been several over the last couple of years .
“ You can look at it in two ways ,” he said . “ There is a risk there will be dividend cuts that you will suffer from , but on the other hand the active managers do not always get it right .”
“ This year the best growth has been from the mining and oil stocks and the managers who made the call to get rid of these have missed out on a lot of the subsequent rebound .”
Of course , the UK is not the only region in which to go looking for dividends and over the last 10 years , active investors have had much greater choice in terms of where to seek income . Just like the UK , Laird says tracker funds provide a cheaper alternative in these markets .
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