InvestIng for Income
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.