In­vest­Ing for In­come

Sunday Express - - Your Projects Count -

AC­CORD­ING TO MoneyFacts.co.uk the av­er­age cash Isa now pays just 0.82 per cent a year, while an­nu­ity rates are near record lows.

How­ever, you can fight back by in­vest­ing in a stocks and shares Isa, par­tic­u­larly one in the eq­uity in­come sec­tor.

Funds tar­get­ing this sec­tor of­fer a com­bi­na­tion of in­come from com­pany div­i­dends, plus cap­i­tal growth on top if share prices rise. The eq­uity in­come sec­tor has pro­duced an av­er­age to­tal re­turn of 65 per cent over the past five years, ac­cord­ing to TrustNet.com. As ever with the stock mar­ket you must brace your­self for greater volatil­ity, so make sure you un­der­stand the risks.

Eq­uity in­come is one of the most pop­u­lar in­vest­ment sec­tors of all. Many of the lead­ing funds tar­get UK blue-chip com­pa­nies such as BP, Cen­trica, HSBC, Glax­oSmithK­line, Royal Dutch Shell and Voda­fone, whose div­i­dends typ­i­cally yield be­tween 4 and 6 per cent a year.

Div­i­dends are not guar­an­teed but eq­uity in­come funds in­vest in a spread of stocks, to re­duce the dam­age if one com­pany is forced to scrap its div­i­dend or its share price slips. Most com­pa­nies try to in­crease their div­i­dends year af­ter year, which means you get a ris­ing in­come as well, giv­ing valu­able pro­tec­tion against in­fla­tion.

Adrian Low­cock, in­vest­ment di­rec­tor at Ar­chi­tas, rec­om­mends in­vest­ing in a hand­ful of eq­uity in­come funds, for fur­ther di­ver­si­fi­ca­tion. His first tip is CF Wood­ford Eq­uity In­come, run by star fund man­ager Neil Wood­ford, which un­der­per­formed in the mar­ket last year, but should bounce back. It cur­rently yields 3.19 per cent a year, be­fore charges.

Low­cock rec­om­mends bal­anc­ing this with Fideli­tyMoney­builder Div­i­dend, which tar­gets large, lower-risk FTSE 100 stocks in sec­tors such as phar­ma­ceu­ti­cals, con­sumer goods and reg­u­lated util­i­ties, and yields 4.18 per cent.

He names three other UK funds worth con­sid­er­ing, Even­lode In­come, which yields 3.30 per cent, JO Ham­bro UK Eq­uity In­come with in­come of 4.29 per cent, and MI Chelver­tonn UK Eq­uity In­come at 4.19 per cent.

“By hold­ing com­ple­men­tary eq­uity in­come funds your in­come is more di­ver­si­fied and your port­fo­lio less volatile as funds will per­form dif­fer­ently at dif­fer­ent times.” You can also in­vest in in­comegen­er­at­ing com­pa­nies beyond the UK, with one op­tion a type of fund called an in­vest­ment com­pany. Many run a port­fo­lio of global com­pa­nies giv­ing you ex­po­sure to the US, UK, Europe and emerg­ing mar­kets such as China.

Three of these funds have now reached the im­pres­sive mile­stone of in­creas­ing their div­i­dend for 50 con­sec­u­tive years: City of Lon­don In­vest­ment Trust, Bankers In­vest­ment Trust and Al­liance Trust.

Annabel Brodie-Smith, com­mu­ni­ca­tions di­rec­tor at the As­so­ci­a­tion of In­vest­ment Com­pa­nies, says these funds store div­i­dend in­come in the good years and use them to boost div­i­dends when mar­kets are strug­gling. “In the cur­rent low in­ter­est rate en­vi­ron­ment, with in­fla­tion creep­ing up, the abil­ity to ‘smooth’ div­i­dends is a unique ad­van­tage.”

City of Lon­don In­vest­ment Trust yields 3.90 per cent, Bankers In­vest­ment Trust yields 2.31 per cent and Al­liance Trust yields 1.86 per cent. You also get cap­i­tal growth on top, for ex­am­ple, Al­liance Trust has de­liv­ered a to­tal re­turn of 109 per cent over the past five years, Bankers has re­turned 104 per cent and City of Lon­don 71 per cent.

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