Jump on the dividend gravy train

down debt or, as is increasingly the case, return excess capital to shareholders via dividends and share buybacks.’

Finally, the FTSE 100 Index is little higher than it was this time last year, so investors – including influential and strident institutional shareholders – are demanding extra income to boost their portfolio returns.

If companies do not respond in a positive way, the consequences can be extremely painful, leading to ‘activist’ investors demanding drastic change – a business restructuring or a change of management.

Why dividends are so compelling

DIVIDENDS are a key source of return for stock market investors. According to Hargreaves Lansdown, an investment of £10,000 in the FTSE 100 Index ten years ago would now be worth £13,751 without dividends factored in – but £20,095 if they had been reinvested.

Current dividends also look attractive against other asset classes such as ten-year Government bonds that are yielding 1.5 per cent and cash. Also, there is a strong correlation between firms that grow their dividends consistently and stellar overall returns for i nvestors – both share price increases and rising dividends.

How to participate in the ‘divi’ bonanza

ANYONE looking to build an investment-based income fortress has two options. They can either put together a portfolio of individual shares that are well known for paying dividends – or purchase funds and stock market listed investment trusts with a strong income bent.

Either way, it makes sense to manage the portfolio via an online investment platform. This allows investors to buy and sell stocks and funds easily and also keep an eye on their portfolio’s progress.

These platforms – run by the likes of Hargreaves Lansdown and AJ Bell – let investments sit inside either a tax friendly Isa or self-invested personal pension. Or outside.

A maximum of £20,000 a tax year can be invested in an Isa. Although contributions are made from taxed p a y, all Isa proceeds are tax-free. There is a tax relief boost on pension payments – but c o nt r i buti o n restrictions now apply to additional rate taxpayers.

For any investments held outside these tax-friendly wrappers, a maximum £ 2,000 of dividend income can be received tax- free in the current tax year.

For dividend sums above this limit, investors will be taxed at 7.5 per cent if basic rate taxpayers. For higher and additional rate taxpayers, the tax is 32.5 per cent and 38.1 per cent respectively.

Build your portfolio of income-friendly shares

THE best listed companies to buy for income are those that look capable of growing dividends over time, and delivering, in Mould’s words, a ‘dream combination’ of share price growth and dividend yield.

With yields ranging between one and eight per cent, it may be tempting to opt for companies offering the juiciest income. But this can backfire. Mould says: ‘ There are few investments worse than a high-yielding stock where the dividend is then cut and the shares plunge in value as a result. It is adding capital injury to yield insult.’

A more sensible approach would be to opt for shares with a record of dividend increases – for example, safety products manufacturer Halma or outsourcing group Bunzl. Although the respective yields of 1.1 per cent and 2.2 per cent look unappealing, the companies have grown dividends every year since 1979 and 1994.

For those who require a little more i ncome j am t oday, Mould says Royal Dutch Shell’s 5.2 per cent yield looks attractive on the back of the recent oil price rally and a bout of cost cutting.

Preferably, ardent income seekers should buy shares in a company before it goes ‘ex-dividend’, thereby entitling them to the next dividend payment.

But most important is to assemble a portfolio based on companies with good dividend prospects.

That means being prepared to absorb research on companies, read the financial pages of newspapers (Midas, Page 60) and examine company accounts. The dividend record of a company is usually detailed on its investor relations website.

The case for equity income funds and trusts

THERE are investment trusts, listed on the stock market, that have delivered a growing income for shareholders going back years, plus capital return on top. Income-focused investment trusts are ideal for investors because they are able to build reserves of income for times when the wider dividend environment may be tough.

This then gives them scope to keep their shareholders sweet with continuous annual dividend rises by dipping into reserves. They also invest across a broad spread of companies, and sometimes markets, thereby diversifying risk.

According to the Association of Investment Companies, 22 trusts have dividend growth records extending beyond 20 years.

Forty- three have at least ten years of consecutive annual dividend increases.

Some of the trusts derive income primarily from UK listed companies although not just FTSE 100 shares. They include City of London, run by fund giant Janus Henderson, JPMorgan Claverhouse, Murray Income (Aberdeen Standard Life) and Merchants (Allianz Global Investors). More international trusts include Alliance, Bankers, Scottish Mortgage and Witan.

The association lists those trusts with the longest records of dividend growth at: theaic.co.uk.

There i s also an abundance of investment funds with a UK equity income label – the most famous

being Woodford Equity Income run by Neil Woodford and Invesco Perpetual Income ( the fund he used to run).

Unlike investment trusts, these funds cannot keep income back for rainy days. It means their income payment record can sometimes be patchy.

Research by investment specialist FundExpert has identified ten UK income funds that have increased dividend payouts to investors in at least eight of the past ten years.

Top of its ‘ saints’ list is Troy Trojan Income with dividend increases in each of the past ten years.

BlackRock UK Income, JOHCM UK Equity Income and Rathbone funds Blue Chip Income and Income have increased them in nine of the ten years. Brian Dennehy, managing director of FundExpert, says income opportunities also abound outside the UK, especially in Asia.

Funds with an Asian income focus include Matthews Asia Dividend, Henderson Asian Dividend Income and Schroder Asian Income.

Most income funds offer investors two ways to participate – via income or accumulation units.

Laith Khalaf, analyst at Hargreaves Lansdown, says: ‘Generally, investors who want to reinvest should choose accumulation units as these reinvest dividends automatically.

‘ Those who want control over their dividend income – maybe reinvesting it elsewhere or drawing upon it – should opt for income units.’

While some investors will need a regular stream from an income fund, others will not. Reinvesting income makes sense.

Fidelity’s Currie says: ‘It is always best to reinvest income.

‘In a similar fashion to compound interest, reinvested dividends can significantly grow an investor’s original capital investment and over time supercharge investment returns, particularly if the fund’s underlying investments perform well.’

One big warning. Shares and i nvestment f unds can f al l in value, especially over the short term. Only long- term investors should grab a share of the dividend bonanza.