Using funds to pay your monthly bills
We get recommendations from the experts on funds which pay dividends 12 times a year
THE LEAST DIVERSIFIED FUNDS TEND TO BE THE MOST UNRELIABLE, OFTEN DEPENDING FOR INCOME ON A SPECIFIC GEOGRAPHY OR SECTOR OF THE MARKET
Unless you’re retired, most of us are used to getting a monthly pay packet with cash paid into our current account which is then used to pay all our regular bills.
Once you’re in retirement, the loss of this income stream can be frustrating to some. One solution is to put some of your savings in investment funds which pay dividends once a month, as a source of money to help pay the bills.
These funds don’t all pay exactly the same amount of money each month and dividends are never guaranteed payments.
Some funds strive to make equal payments throughout the year and hold back some income so they’ve got a buffer if times get harder. This is calling smoothing. More cash may therefore be paid out towards the end of the year if the fund does not face any shortfalls and there is excess money in its dividend pot.
EXPERTS GIVE THEIR BEST FUND IDEAS
Chase de Vere’s head of communications Patrick Connolly suggests investors should look at Fidelity Extra Income (GB00B41M2W81), which is managed by a strong team led by Ian Spreadbury.
‘It typically invests 60% in
investment-grade bonds and 40% in high yield bonds, has an excellent long-term record and pays a competitive yield, which is currently 3.7%,’ says Connolly. He also flags Threadneedle UK Monthly Income (GB00B8BV4509) for its ‘consistent record’. The fund is targeted at investors who value a higher and more regular income with a 4.3% yield.
Henderson Fixed Interest Monthly Income
(GB00B7GSYN71) is another one for investors to consider, according to Square Mile research manager John Monaghan.
The managers of the fund, Jenna Barnard, John Pattullo and Nicholas Ware, target an income yield of around 6%, although Monaghan says this is not guaranteed and varies due to market conditions.
He adds the smoothed payments from the fund are useful for people looking to
‘match income payments with cash outgoings’ such as bills.
Charles Stanley pensions and investments analyst Rob Morgan believes funds investing in government bonds should offer a more predictable income stream compared to those investing in equities.
WHAT IS IMPORTANT TO CONSIDER WITH MONTHLY DIVIDEND FUNDS?
The managing director of Whitechurch Securities, Gavin Haynes says it is more important to find out where the underlying fund is invested and whether it fits your risk profile rather than get hung up on the frequency of dividend payments.
There is a danger the investment process of a monthly dividend paying fund will be driven by targeting assets which pay out income at certain points in the year rather than those which are of the highest quality.
Haynes recommends that investors spread the risk by investing in a portfolio of funds that are diversified across different assets classes. He highlights Artemis Monthly Distribution (GB00B6TK3R06), Invesco Perpetual Global Targeted Income (GB00BZB27M05)
and M&G Episode Income (GB00B7FSJ224), citing strong management and well-balanced portfolios.
Hargreave Hale investment manager Ian Kavanagh warns the least diversified funds tend
IT IS MORE IMPORTANT TO FIND OUT WHERE THE UNDERLYING FUND IS INVESTED AND WHETHER IT FITS YOUR RISK PROFILE RATHER THAN GET HUNG UP ON THE FREQUENCY OF DIVIDEND PAYMENTS
to be the most unreliable, often depending for income on a specific geography or sector of the market.
If a sector hits a rough patch, dividends may be cut and there will not be alternative assets in the portfolio to make up the difference. As a result, the income from the fund could fall. He flags Standard Life UK Real Estate (GB00BJZ2V336) as a monthly dividend payer that lacks diversification.
Kavanagh is also cautious about investing in Japanese or emerging markets for a reliable income as few have Western style progressive dividend policies. This implies the dividend is not a priority if balance sheets come under pressure.
Among the investment
manager’s favourites is Threadneedle Sterling Short Dated Corporate Bond Fund
(GB00B7SH5738) although it has a modest yield of 1.7%.
Morgan says investors should be wary of funds that use ‘unconventional means’ to enhance their income by using derivatives.
While these financial instruments can boost income, it arguably also adds an extra layer of risk to your investment.
Funds are a great source of income for investors, but you should always look under the bonnet to ensure the underlying investments can deliver the consistency of income payments to meet their current and future needs and that the investments are a suitable fit for your risk appetite. (LMJ)