What Is Equity Income?

Equity income is primarily referred to as income from stock dividends. Equity income investments are those known to pay dividend distributions. Stocks are the most common type of equity income investment. Mutual funds and exchange-traded funds can be managed with a focus on equity income. These funds invest in dividend-paying stocks.

Key Takeaways

  • Equity income is money earned from stock dividends, which investors can access by buying stocks that have declared dividends, or by buying funds that invest in dividend-paying stocks.
  • Income-paying stocks or funds are typically preferred by more conservative investors looking for value stocks that they can buy and hold and that can provide steady, long-term payments.
  • Investors interested in equity income should look to quality stocks that have a high dividend yield—both the trailing and forward yield.
  • Investors may also want to consider if the stock or fund has a dividend reinvestment program, and what the payments mean for taxes.

Understanding Equity Income

Equity income investments offer an additional return component to capital gains. Companies pay dividends for equity income. Fund managers can also manage an equity income-focused strategy.

Dividend-paying companies are typically large, well-established companies with mature revenue and earnings. Most dividend-paying companies also have a well-established commitment to paying shareholders dividends with a targeted annual dividend payout rate factored into their corporate financial planning.

The Vanguard High-Dividend Yield Index Fund (VHDYX), the Vanguard Dividend Appreciation Index Fund (VDAIX), the Columbia Dividend Opportunity Fund (INUTX), the Federated Strategic Value Dividend Fund (SVAAX), and the Neuberger Berman Equity Income Fund (NBHAX) are among the highest dividend-paying mutual funds, all paying at least 2%.

Equity Income Investing

Income paying companies are often favored by moderately conservative investors. They may also be sought by investors specifically seeking income investments. Often income paying companies are value stocks that investors seek to hold long-term.

Equity income funds are also popular for the same reasons. Most large investment managers will typically have equity income fund offerings because of their high demand. The objective for most equity income funds will be to invest for capital appreciation and income. Therefore, they seek stocks with value appreciation that also have an equity income component.

An equity-income investment’s dividend yield is a top characteristic considered in equity income investing. Stocks and funds will have a trailing and forward dividend yield that helps investors gauge the payout as a percentage of the price.

When investing for income, investors should also consider dividend reinvestment programs and taxes. Dividend reinvestment allows the investor to reinvest the dividends in fractional shares of the stock or fund. Investors must pay taxes on equity income received from stock and fund investments regardless of whether or not the distributions are reinvested.

Big blue-chip companies often provide high dividend payments, with at least a dozen of the 30 stocks that make up the Dow Jones Industrial Average paying out 3% or more.

Equity Income Examples

Below are some of the top equity income investments in the market as of August 2019.

International Business Machines (IBM)

International Business Machines is one of the highest yielding dividend stocks in the Dow Jones Industrial Average. As of August 18, 2019, the stock had a forward dividend yield of 4.92%.

The Vanguard Equity Income Fund (VEIPX)

The Vanguard Equity Income Fund is a popular mutual fund for income investors. It has a forward dividend yield of 2.63%. As of August 18, 2019, the fund was trading at $35.01. It seeks to generate an above-average level of equity income with long-term capital appreciation investment considerations as well. 

The fund is actively managed and invests at least 80% of its assets in stocks. The total net assets in the fund are $35.79 billion. Its expense ratio is 0.27%. A minimum investment of $3,000 is required in the investor share class.