Income/value stocks the key to returns as risk rebounds in 2010

As its name suggests, the UK equity income sector provides exposure to companies that pay above-average dividends (the criteria for inclusion in the IMA UK equity income sector is a dividend yield of at least 110% of the FTSE All Share index yield).

Stocks that pay higher dividends tend to have characteristics that make them fundamentally cheap, such as relatively low price/book and price/earnings ratios. In other words, the UK equity income sector is really “value” style investing. Value style investing, which focuses on stocks that are “cheap”, is not concerned with drivers of earnings growth and normally assumes the P/E is below its justifiable level. Contrast this to “growth” investing, which focuses on companies that are expected to exhibit rapid growth of earnings. Historically, “value” outperforms “growth” around two-third...