Equity Income

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.

BREAKING DOWN 'Equity Income'

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

Investing for Equity Income

Below are two of the top equity income investments in the market as of November 2017.

International Business Machines

International Business Machines (IBM) is one of the highest yielding dividend stocks in the Dow Jones Industrial Average. As of November 30, 2017, the stock had a forward dividend yield of 3.91%.

Vanguard Equity Income Fund (VEIPX)

The Vanguard Equity Income Fund is a popular mutual fund for income investors. It has a dividend yield of 2.49%. As of November 30, 2017, the fund was trading at $37.12. 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. Total net assets in the Fund are $30 billion. Its expense ratio is 0.26%. A minimum investment of $3,000 is required in the investor share class.