There are approximately 450 open-ended funds that pay dividends monthly. The majority invest in short-term money market instruments or different types of bonds, but there are also plenty of multi-asset mandates, as well as property and equity funds.

Given the wide degree of choice, it is perfectly feasible to put together a diversified portfolio in which all of the constituents pay a monthly dividend. This can be tailored to suit your income and risk preferences.

Bond funds

Monthly income funds are available in most of the different bond sectors. These types of securities are ideal for this sort of mandate as the timing and level of the income accruing in the fund is much more predictable than for other asset classes.

The level of yield gives a good idea of the risk. For example, at the upper end of the spectrum there are funds like JPM Global High Yield Bond (GB00B235R159) which yields 6.01%, while at the other end there are products like Fidelity MoneyBuilder Income (GB00B3Z9PT62), a UK corporate bond fund paying 3.39%.

Darius McDermott, managing director of Chelsea Financial Services, recommends Invesco Perpetual Monthly Income Plus (GB00BJ04K265) which is yielding 5.43%. It is unusual for a bond fund in that it can invest up to 20% in UK equities to enhance the income and capital returns.

‘Invesco is widely considered to be one of the UK’s elite bond houses and this fund is their flagship fixed income product. It has a flexible mandate and is designed to offer investors broad exposure to the UK fixed income market and provide a high level of income,’ says McDermott.

Patrick Connolly, a certified financial planner at Chase de Vere Independent Financial Advisers, prefers Fidelity Extra Income (GB0005314926). He claims the fund is managed by a strong fixed interest team led by a very experienced manager in Ian Spreadbury.

‘It typically invests 60% in investment grade bonds and 40% in high yield bonds, has an excellent long-term record and pays a competitive yield, which is currently 3.2%,’ says Connolly.

Multi-asset funds

A multi-asset fund might interest someone who prefers a more diversified option with a greater emphasis on long-term capital growth. These normally pay a lower starting level of income than a bond fund, but aim to increase the distributions over time.

Connolly suggests Artemis Monthly Distribution (GB00B6TK3R06), yielding 3.9%. This invests in both bonds and equities from the UK and around the world.

‘It combines the talents of two highly rated managers; Jacob de Tusch-Lec, who runs the equity part which is usually 40% of the fund, and James Foster who looks after the fixed interest. They combined forces five years ago and the performance since then has been very impressive.’

McDermott recommends Premier Multi Asset Monthly Income (GB00B7GGPC79); a fund-of-funds which he says is designed to produce a high sustainable income and strong absolute and relative growth through robust risk management.

‘It aims to provide equity-like returns with less volatility through a multi-asset structure and is yielding 4.48%.’

Simon Evan-Cook, multi-asset manager at Premier Asset Management, says the monthly income requirement means his team have a preference for underlying funds that pay out more frequently than once a year so they receive a fairly smooth flow of distributions. Above all, it’s the quality of the fund that is paramount.

‘There are two major ways that we guard against the risk of being unable to maintain our dividend. The first is an in-depth analysis of the fund we’re buying, and the second is to diversify across plenty of funds, markets and asset classes.’

Other asset classes

There are various other monthly income funds that provide exposure to areas such as UK or overseas equities and commercial property. A good example is Threadneedle UK Monthly Income (HN0001529568), a UK equity income fund yielding 4.07%.

An even greater level of income can be found with Fidelity Enhanced Income (GB00B7FB6W02), yielding 6.46%. The fund invests in UK dividend-paying shares and uses covered call options to enhance the yield.

A more conservative option is Fidelity Global Dividend (GB00B7FQHK03) that is available as a monthly income share class and is yielding 2.87%.

McDermott describes it as a core global income fund with a value bias that aims to pay a regular and growing income while preserving capital.

Caroline Pearce, investment director at Fidelity International, says the fund manager demands certain characteristics from each of the companies in which he invests. These include: a strong balance sheet; a predictable, resilient return profile; strong cash conversion and transparent financial statements.

‘All of these attributes help to identify those companies that can support a sustainable dividend yield and also provide the potential for dividend growth in the future.’

Income considerations

Open-ended funds have to pay out all of the income that accrues in the fund over their accounting year (the accumulation units allow you to roll it up in the fund). You need to invest in the monthly income units to receive it in the form of monthly cash payments.

McDermott says it’s important to check if the income paid out of the fund is smoothed or lumpy. ‘This may or may not matter, depending on your circumstances, but if you are using the monthly income to pay bills for example, a smoothed payment is likely to be more attractive.’

He also suggests looking to see where the fund charges are paid from. If you are looking for monthly income, you might prefer to go for a fund that deducts the charges from capital instead of income so as to maximise the distributions.

Open-ended funds are only allowed to distribute income once it has been earned and it can then be carried forward from month to month, but not beyond the fiscal year end.

‘In light of this, our policy is to pay out slightly more “modest” payments for most of the monthly payments, then sweep up any extras for the interim and final payments,’ explains Evan-Cook at Premier Asset Management.

Investment trusts

UK domiciled investment trusts have more flexibility as
they can transfer up to 15% of their annual income to their revenue reserves, a bit like a rainy day pot of money.

They can then use this money to smooth future dividends so that investors should be able to enjoy a consistent or rising level of annual income, even in tough market conditions.

We’ve identified five investment trusts that pay a monthly income. F&C Commercial Property Trust (FCPT) and Ediston Property (EPIC) both invest in commercial property and are yielding 4.1% and 5% respectively with equal monthly distributions.

The other three are all high yielding asset-backed debt funds. Fair Oaks Income (FAIR), TwentyFour Select Monthly Income (SMIF), and SQN Asset Finance Income (SQN) are yielding 12.7%, 7%, and 6.8% respectively.

To earn these high yields entails a fair degree of risk. That was recently evidenced by a 10% fall in the share price of SQN when it announced that a solar cell company to whom it had provided finance had entered Chapter 11 bankruptcy protection. (NS)

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