We look at the products on offer and how some of them generate dividends
Thursday 04 Apr 2019 Author: Daniel Coatsworth

Wouldn’t it be nice to have an investment portfolio that paid you a regular stream of cash so you can get on with your life without worrying about paying the bills? This can be particularly desirable for people in retirement who need to find a way of substituting money they used to get from their working salary.

Traditionally funds, stocks and bonds pay dividends or coupon payments once every three or six months. However, funds are increasingly speeding up their payment frequency to meet demand from retired individuals who want a monthly inflow of cash to help fund their monthly outgoings.

HOW MANY FUNDS PAY MONTHLY?

Our calculations suggest nearly 200 funds and investment trusts now pay dividends every month, according to data from Trustnet. There is also a single exchange-traded fund (ETF) doing the same.

The fact that a fund pays out a monthly income isn’t enough reason to buy any fund from the list. You would still need to do the same thorough research to check whether they match your risk appetite, have a good investment process and a proven track record.

It is also worth considering the size of a fund as many of the products on the list look sub-scale and are therefore vulnerable to being wound up or are inefficient.

ANALYSING THE LIST

We’ve stripped out the funds that are worth less than £200m and also ones that pay a yield below 3%. After all, you can now get 2.4% interest on the best-buy cash account – as offered by ICICI Bank UK – so why take the risk of being invested in the market for a potential return below 3% when you can get nearly that amount for no risk at all (apart from the impact of inflation). This filter leaves us with a list of 65 open-ended funds and five investment trusts.

The goal in retirement is to protect your money and generate an income, so you may want to avoid some of the higher risk funds on the list that invest in emerging market debt, for example.

Enhanced income funds normally pay a slightly higher yield than a standard income fund because they sell options on some of their holdings. This gives the purchaser the right, but not an obligation, to buy a stock from the fund at a pre-determined ‘strike’ price on a specific future date.

For this service, the fund receives a premium regardless of whether the option is exercised or not.

If the stock’s price does not hit the strike price by the time the contract expires the fund keeps the premium, which is distributed to investors as part of the overall dividend which also includes some or all of the natural income from the portfolio.

If the strike price is reached the fund still keeps the premium, but it has to pay any additional increase in the stock’s value over and above the strike price to the purchaser. That means the fund’s upside is limited – hence the investor is giving up potential gains in exchange for a higher dividend.

THREE FUNDS TO BUY

From the list we would suggest you consider the following three funds, based on the fund managers’ track record, investment style and potential reward versus the risk taken.

Artemis High Income (BJT0KR0) yields a very attractive 5.39%. It predominantly invests in bonds and also holds some shares.

This fund is probably on the higher end of the comfortable risk levels for someone in retirement because fund manager Alex Ralph invests in bonds with a lower credit rating in order to generate a higher level of income. Her portfolio currently includes investments in leisure group Center Parcs and healthcare firm Voyage Care.

Man GLG UK Income (B0117D3) contains a mixture of shares and fixed income and yields 5.1%. Fund manager Henry Dixon has a value approach and is focused on delivering a growing income and not taking excessive risks.

Investors should note that Man GLG and other monthly-paying funds may not pay dividends in equal installments. You’re likely to see 11 payments the same and the last payment flushing out any remaining income.

Fidelity Multi Asset Income (BFPC050) aims to achieve an income yield within a 4% to 6% range a year, with the yield currently at the lower end of that range. It invests mainly in funds which provide global exposure to a mixture of asset classes, and ongoing charges are 0.9%. In terms of asset allocation, investment grade bonds have the greatest weighting at 25%.

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