There is a strong argument to suggest that if you want to buy just one fund, a strategy focused on generating regular income through investments – like dividends from stocks or interest from bonds – is the safest route.
It’s not the sexiest option – but I’d suggest no investment portfolio is really complete without an income element.
There are many ways to access an income portfolio. From an equities perspective, the UK is the most mature dividend-paying market in the world. Shareholders in companies listed on London’s main market received £92.1bn in dividend payments during 2024.
You can easily achieve an income in the region of 4-5% from a UK equity income fund – on top of capital growth from these companies. Other regions like the US, Europe and particularly Asia do not offer the same levels of income. However, as these markets are not as mature, from an income-paying perspective, there is greater scope for long-term dividend growth.
With interest rates still at elevated levels, many UK and US Government bonds continue to offer yields above 4%, while corporate bonds are offering yields higher still (but have a higher risk of not paying their debts). These are also attractive, although I would not expect the same amount of capital growth.
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The power of reinvested dividends
There are a couple of ways investors can use income funds. One is to simply take the dividends paid out – be it on a monthly, quarterly or annual basis – to pay for life’s needs as and when they occur. The second is to reinvest dividends – I cannot understate the importance of this factor in producing long-term returns for investors.
It depends on your position in life. Reinvesting dividends or interest may seem a logical approach to help your investments grow if, for example, you already have enough income from your job and you’re saving for a financial goal that is many years away, such as retirement.
But the difference in returns is stark. According to Barclays’ 2023 Equity Gilt Study, £100 invested in UK shares in 1945 would have grown to £215 by March 2024, after adjusting for inflation – equivalent to an annual gain of just 1% in real terms, over almost eight decades.
However, an investor who continually reinvested the income generated by those same shares would have seen their wealth grow to £5,636 – again, after inflation. That equates to an average annual return, in real terms, of 5.4%.
The figures are hard to deny. Indeed, even Albert Einstein himself is said to have called compounding the ‘eighth wonder of the world’. With interest rates falling to record lows post the global financial crisis, finding an attractive income was not easy, but things have changed in recent years with a number of routes to both attractive and diversified income streams. With this in mind, here are five options for investors to consider.
Close to home – Rathbone Income
I mentioned the UK is a hotbed for income, and this fund has one of the best – if not the best – track records for delivering an income. Manager Carl Stick runs a concentrated portfolio of 30-50 holdings, all of which are chosen for their high quality and visibility of earnings. He is something of a contrarian, meaning the fund may lag behind while his peers ‘catch up with the news’. The fund has returned 26.9% in the past five years and has a dividend of 4.42%.
Going global – M&G Global Dividend
Manager Stuart Rhodes avoids the highest yielders and buys companies that are growing their dividends every year. The fund is quite different because Rhodes is not afraid to have some commodity exposure. A portion of the fund is also invested in rapid growth businesses, which may have small starting dividends, but are growing quickly. The success of the philosophy is borne out by the numbers, with the fund returning 83.3% over the past five years, but with a slightly lower yield of 2.26%.
Opportunities in Asia – Schroder Asian Income
Asia is often thought of as a growth market, but it can play an important role for income investors, with almost 10,000 dividend-paying companies in Asia ex-Japan.
Schroder Asian Income manager Richard Sennitt targets companies underpriced by the broader market because of short-term fears, despite having attractive fundamentals. Many of these stocks have attractive yields at purchase, but Sennitt is also not scared of buying stocks he thinks will be the stars of the future. The fund has returned 47.4% in the past five years, with a yield of 4.03%.
Options in fixed income – Artemis Corporate Bond
As mentioned, fixed income is currently offering attractive yields across the asset class. This fund targets investment-grade corporate bonds, with the flexibility to pick out a number of attractive special situations across the market. Manager Stephen Snowden is an excellent stock picker, who combines this with long-term strategic and thematic views to identify areas to tilt the fund. The fund has returned 7.1% in the past five years, with a yield of 4.71%.
A one-stop solution – BNY Mellon Multi-Asset Income
Still not sure where to invest? Well, multi-asset funds make the decision for you. BNY Mellon Multi-Asset Income aims to achieve a stable income with the potential for capital growth over the long term (five years or more) by investing in equities, bonds and alternatives. The fund has returned 31.4% in the past five years, with a yield of 4.22%.
Darius McDermott, managing director of Chelsea Financial Services and FundCalibre
