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Funds paying out monthly money

It is the goal of many investors: getting a regular income from a portfolio without having to lift a finger. In the past, receiving a monthly income from a portfolio could be problematic, as dividend payments were sporadic. Now there are a range of options for those who want their portfolio to pay them a monthly “salary”. Here are the ways you can do it.

Monthly income funds

The most obvious option to generate a monthly income is to buy funds that do just that. Some funds explicitly set out to provide investors with a monthly income, while others – such as many property funds – pay out dividends monthly, too.

Darius McDermott of fund shop Chelsea Financial Services said that most monthly income funds attempt to offer 11 monthly payments of a similar amount and a 12th that varies. The exact level of income will depend on the fund’s performance.

“Many will try to make the 12th month a bigger payment if they can, but it will depend on market conditions,” he said.

However, in order to deliver this monthly income, these funds will be restricted in how they can invest.

James Baxter of adviser Tideway said there is often a mismatch between the regular payouts from monthly income funds and the income the funds actually receive from the assets they are invested in.

He said: “It puts pressure on managers to invest in assets that distribute income at set points of the year, rather than those that are most attractive from a growth or income perspective.”

He selected Artemis Monthly Distribution as one of the better monthly income funds available. It invests in shares and bonds, and the manager focuses on sustainable yield, said Mr Baxter.

The fund charges 0.89pc annually, and currently yields around 3.7pc. Since launching in May 2012, a £1,000 investment would have generated £244 in income, according to data service FE, and the fund’s total return over that period – of income and capital growth combined – was 92pc.

Mr Baxter said investors need to choose a fund based on what it is actually invested in, rather than just looking at the yield figure, as “it can be very dangerous to invest blindly on past yield alone”.

Invesco Perpetual Monthly Income Plus is another favourite of experts and advisers – and is included in our Telegraph 25 list of favourite funds.

The fund yields 5pc and is largely invested in bonds with a small holding in shares. It charges 0.72pc a year. A £1,000 investment five years ago would have generated £260 in income, while the fund’s total return over that period was 41pc.

Use a holding account

Investors can bypass the monthly income funds and, instead, invest in funds from which they can take a regular payout.

Mr Baxter said: “Most will be better off buying a few funds that generate good, sustainable yields and having the dividends paid into a holding account that contains some cash, too. The holding account can then be used to pay a regular income.”

Investors can do this on most investment platforms. Investors could also have dividends paid into a separate bank account, which then sends a regular monthly income to a current account. This avoids paying investment platform charges on the money.

Again, Mr Baxter warned investors not to target the highest-yielding funds but, instead, those that offer the best long-term returns. “If this scenario does not generate enough income to meet your needs, you will need to supplement this by selling units,” he said.

“In this scenario, it’s vitally important to ensure that you plan, allowing funds enough time to profit so you are not forced to sell at a loss.

“Funds investing in shares should be given at least 10 years, and you need to hold enough cash as protection.”

Build a portfolio of funds

Another option is to build a portfolio of income-paying funds and trusts, that give their dividends at different points in the year (see table).

Building a portfolio this way can mean you can spread your money across more assets, but the downside is that it means income is likely to be less each month. This option does not suit an investor who may be in need of the exact same level of income each and every month.

If consistent dividend growth is a priority, investment trusts can be

Investors can get a regular pay cheque from their savings pots by investing in certain funds

particularly useful. Their ability to hold back income means many have been able to increase their dividend year-on-year for decades. Regular unit trust and Oeic funds have less control to do this.

Is it possible to build a cash portfolio?

The main options available to cash savers are fixed-rate bonds that pay interest monthly. While the top rates have been improving lately, they are still exceptionally low.

The five-year fixed rate from Atom Bank pays 2.25pc a year, while Vanquis Bank’s three-year rate pays 1.9pc.

These are the highest rates with Financial Services Compensation Scheme (FSCS) protection, which covers £85,000 per person, and that have the option to have interest paid monthly.

To generate income this way savers will need a substantial amount more capital to generate the same income as the investment funds.

For instance, someone targeting a £30,000 annual income, before tax, would need more than £1.3m at a rate of 2.25pc. Savers should also avoid exceeding the FSCS protection limit per provider.

There are a number of highinterest current accounts that pay interest monthly, but the balances are limited to amounts typically in the low thousands, so the level of income that can be generated is paltry.

Dividend allowance

There is no tax due whatsoever on the income from any investments held within an Isa.

However, anyone investing for income outside of an Isa – including within a Sipp – needs to be aware of the changes happening to the dividend allowance.

For the 2017-18 tax year, investors can earn up to £5,000 in dividend income tax-free, but that will drop to £2,000 from April 2018.

The tax-free dividend allowance is also on top of the personal tax-free allowance.

So an investor can earn up to £16,500 in dividends in 2017-18 tax free, including the £11,500 personal allowance and £5,000 dividend allowance. However, this only applies if that is their only income.