Revealed: The top investments for monthly income
7:21AM BST 19 Aug 2014
Investment funds paying monthly income are uncommon but treasured by savers wanting frequent payments to supplement pensions or other income.
Of the 2,000 unit trusts or equivalent funds available to private investors, just 20 pay income on a monthly basis. Those which do are an eclectic mix of portfolios holding shares and bonds, or often both. By investing in these most savers are aiming to derive a high, frequently paid income, but because several of these funds have delivered strong returns in recent years, their appeal is spreading to a wider audience.
But unlike the cash Isa accounts which pay income monthly – see the table below for the current top payers – savers’ capital is at risk.
Darius McDermott of Chelsea Financial Services, the broker, is a fan. He said: “Investor demand for these funds is picking up and I expect it to continue as investors gain greater control over their pensions. But it is hard to get high levels of income at the moment, so the higher yields often indicate more risk is being taken.”
How the monthly income funds work
The fund manager of a monthly-paying fund invests savers’ cash in a portfolio of shares, bonds or both. He is limited in how much income he can pay out by the amount of dividends or interest these underlying holdings earn.
He also has to try and pay out the income in more or less equal, monthly instalments, which he can do by holding some income back.
Brian Dennehy, financial adviser and founder of broker FundExpert.co.uk, said: “Smoothing the dividend payments helps the fund manager out if they have a bad month. It can also give investors a bigger payout towards the end of the year, as the excess cash is handed back.”
The income payments are taxed in the same way as other income funds, so if these are held in an Isa there is no further tax to pay.
The funds’ “distribution yields”, quoted as a percentage, give an indication of the yearly income investors can expect based on historic payments.
The funds the experts are backing
Premier Monthly Income, managed by Chris White, is unusual among monthly payers in that it only invests in shares. Mr White invests in high-yielding British firms, comprising mainly blue chips such as BP and GlaxoSmithKline. The fund yields 4.7pc and over the past three years has returned 55pc (capital growth and income payments combined).
Jupiter Monthly Income holds 85pc in shares with the rest in cash and bonds. It yields 5.1pc, and has returned 39pc over three years. A newer fund with a similar investment mix is Schroder Managed Monthly High Income, yielding 5.9pc.
Threadneedle Monthly Extra Income, which also invests around 80pc in shares, yields a lower 3.9pc – which is still considerably higher than the wider UK stock market yield of 3.3pc. This monthly payer is favoured by Lee Robertson of Investment Quorum, the wealth manager, who said: “For me the important thing is that the yield is growing as the fund’s portfolio is positioned to benefit from the steady increase in companies’ earnings as the recovery continues.”
Mr McDermott tipped the recently launched Kames Diversified Income fund. The fund is only six months old but it is targeting a 5pc annual distribution, derived from a portfolio invested 40pc shares and 60pc in bonds.
Then there are the monthly payers where the underlying investments are mainly or only bonds.
That does not necessarily make them less risky, as the capital values of bonds can fluctuate violently. The highest yielding is currently the Alliance Trust Monthly Income Bond fund, paying 5.9pc. The manager has purchased bonds issued by the likes of BT and Orange. The total return for investors over the past three years is 21pc. Other, respected bond based monthly payers include Fidelity Moneybuilder Income, which yields 3.9pc; Invesco Perpetual Monthly Income, yielding 4.7pc, and the Henderson Fixed Interest Monthly Income fund, which yields 5.9pc.
While offering the perk of monthly payments these funds do not necessarily grow annual payouts. Dividend focused investment trusts are better for that purpose.