What is an Equity Income Fund?

An equity income fund is a mutual fund composed largely of dividend-paying stocks.

How Does an Equity Income Fund Work?

Equity income funds are made up of a variety of different income investments, but they generally invest in securities from established, creditworthy companies that make consistent dividend payments. Generally speaking, equity income funds rarely invest in young, high-growth companies.

Some equity income funds only invest in stocks with certain dividend yields, or they only invest in certain types of issuers, stocks with certain characteristics (preferred stock, for example) and certain types of credit ratings. Although equity income funds produce higher returns than money market and bond funds, they are still considered relatively conservative investments.

Why Does an Equity Income Fund Matter?

Equity income funds can hold a wide variety of income investments and can be a great alternative to individual bonds or dividend paying stocks. Because equity income funds are slightly more volatile than bonds or money market funds, they are not recommended for investors who are investing for a year or less.

For income investors who have a longer-term horizon, equity income funds can offer high returns compared to bond or money market funds and can diversify bond-heavy portfolios while allowing for some capital growth. Reinvesting distributions can accelerate this growth as well.

As with other mutual funds, one of the greatest advantages of equity income funds is that it provides instant diversification. And the inclusion of bond-like preferred stock or convertible dividend stock takes some equity income funds to another level of diversification.

Because there are fewer transactions and trading fees involved, investing in an income equity fund can also be much easier and less expensive than investing in several different dividend-paying stocks to make up an income portfolio.