Your Equity-Income Fund Might Not Work the Way You Think

Equity-income funds can be an odd lot. Quirks abound. Investors appreciate the income, yet dividends aren’t tax-efficient. Dividend-focused strategies tend to perform well in down markets, but, as equity strategies, they remain prone to equitylike declines. They tend to fall into either the large-cap value or large-blend parts of the Morningstar Style Box, typically because these funds prioritize either dividend yields or dividend growth. Some prefer a mix of both.

Investors should not assume that a strategy with “equity income” in its name means one thing or another—there’s quite a bit of variety within this group. Instead, investors should take extra care to understand an equity-income fund before buying it to ensure it might be expected to deliver their desired outcomes.

Let’s review three decent—but very different—dividend-focused strategies.

Principal Equity Income PQIAX is a tweener fund. Despite its name and large-value Morningstar Category designation, it is in many ways a dividend-growth strategy. This fund, which has a Morningstar Medalist Rating of Bronze, clearly differs from equity-income funds in down markets, having lost more than the Russell 1000 Value Index in all of the past five market corrections of at least 10%. Also, its 12-month yield of 1.2% as of June 2026 was shy of the index’s 1.4%.

However, some of its characteristics fall right in the middle of equity income. Its annualized 10-year return of 11.2% through June 2026 slightly lagged the index. The same was true for its 10-year Sortino ratio, which is a measure of risk-adjusted returns focused on downside performance.

Meanwhile, Neutral-rated American Century Equity Income’s TWEIX conservative approach weights holdings based on how narrowly lead manager Brian Woglom and the team view a stock’s expected outcomes. In other words, steadier stocks get bigger weightings, while expensive ones with large upside potential are typically left out. Woglom also invests around 20% of the portfolio in hybrid securities such as convertible bonds and synthetic securities. This sleeve seeks to boost yield and add downside protection, and, in concert with the defensive approach, it has achieved both aims.

This strategy hasn’t lagged the index in a drawdown period of 10% or more over the past two decades, and it’s a top-decile yield provider. Yet, the fund has not outperformed; it fell in the lower half to lowest third of the large-value category over trailing three-, five-, and 10-year periods through June 2026, and risk-adjusted returns were worse in some periods.

Last, it’s hard to beat passive here. Gold-rated Vanguard High Dividend Yield Index VHYAX and its exchange-traded fund counterpart Vanguard High Dividend Yield ETF VYM track the FTSE High Dividend Yield Index, the standard-bearer for yield-focused equity-income strategies. The index ranks large- and mid-cap stocks in the FTSE USA Index, excluding REITs, and takes the higher-yielding half. It then weights the stocks by float-adjusted market cap, putting most assets in larger, more stable names. This strategy has been a strong performer in drawdowns while outperforming the broader category index over the past decade in both total and risk-adjusted returns. Its yield is among the best, even topping that of American Century Equity Income. If one strategy can represent the higher-yielding side of equity income, this is it.

This article first appeared in the June 2026 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor by visiting this website.