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With just a few days to go until the end of the tax year, you might be looking for some last-minute inspiration for your Isa.
Income funds and dividend-paying stocks remain popular among investors this year as they hunt for stable returns.
These high-yield investments can help generate extra cash to help in the short term, while compound interest can further boost profits in the long term.
Income Seekers: Investors are looking for income funds and bonds for stable returns
And with tax burdens rising due to frozen thresholds, holding income-producing assets in an Isa is more valuable than ever.
We ask experts where income-seeking investors should consider parking their money.
Why invest for income?
Although inflation may be approaching the Bank of England’s 2 percent target, it continues to eat into savings pots and banks are starting to cut savings rates.
Adding dividend-paying investments to your portfolio can provide you with reliable income and capital growth.
If you’re looking for income-generating stocks and funds, focus on the high-yield funds. The higher the return, the more money is paid out in relation to the costs of the fund.
Jason Hollands, managing director of Bestinvest, notes that investors “should not necessarily pursue the highest returns as this can come at the expense of growth potential.
‘If you need your investments to support you in retirement for many years, it is important that the capital value is not eroded and that payouts increase over time to compensate for inflation. Equity funds offer more opportunities for this than bond funds or infrastructure.’
Darius McDermott, managing director of FundCalibre, says: ‘Prioritizing income in your Isa has several benefits: the return in your own pocket can supplement your lifestyle or help pay the bills, while the compound interest further boosts long-term capital gains can increase.’
Diversifying your portfolio across different investment styles, assets and regions will be key to ensuring it keeps pace with inflation.
Where should income-seeking investors look?
If you want to invest for income, you can pick up individual shares in companies that pay dividends.
There are also funds and trusts specifically designed for income, which can be a simpler option.
If you want to invest in income funds, look for funds with “inc” in their title, instead of “acc,” which indicates growth. ‘Inc’ funds will pay dividends directly to investors rather than reinvesting them back into the fund.
There are plenty of options available to investors looking for income: stocks, bonds and real estate, as well as alternatives such as renewable energy.
Dan Coatsworth, investment analyst at AJ Bell, said: ‘The UK market is blessed with many income opportunities, many of which offer higher dividend yields than other regions such as the US. That’s music to the ears of retired people who may rely on their investments to generate income to pay the bills.
‘Many UK share funds are concentrated in the same group of shares, especially in the banking, oil and life insurance sectors, where some of the most generous dividends can be found.
The UK market is blessed with many income opportunities
Dan Coatsworth, A. J. Bell
‘Earnings growth is low or unpredictable in these sectors. That’s why companies use generous dividends to make their shares attractive to investors.’
Paul Angell, head of investment research at AJ Bell, is in favor Male GLG income who invest in ‘undervalued and unloved companies… companies trading below replacement cost and companies whose profit streams appear to be undervalued by the market.’
He said: “Fund manager Henry Dixon has extensive experience and his analytical mindset brings a level of pragmatism that allows the fund to navigate a range of market conditions.
‘This is a very actively managed fund, which can deviate significantly from the index and has a high level of turnover. These factors often cause both fund volatility and transaction costs to be high.’
Dutch chooses Blackrock UK income which backs companies ‘with strong dividend growth potential rather than today’s highest payouts.’
Top holdings include Shell, AstraZeneca, Rio Tinto and HSBC, and the current yield is 3.9 percent.
Bonds are in demand again
Fixed income can also be a good place to start for investors looking to add some income to their portfolio. In an era of ultra-low interest rates, bonds yielded almost 0 percent, meaning investors overlooked them.
With interest rates at higher levels, investors have fallen back in love with bonds that have “reclaimed their rightful place as an income source,” McDermott says.
Darius McDermott says bonds have become an income source again
Yields on investment-grade corporate bonds are at their highest levels in years, offering investors the opportunity to lock in income for the foreseeable future.
McDermott is in favor of the Liontrust Sustainable Future Monthly Income fund and Royal London Corporate Bondboth of which currently offer returns of more than 5 percent.
“Risk-averse investors may prefer government bonds, such as government bonds or government bonds, which also currently offer competitive returns,” he says. ‘Historically, they have been negatively correlated with stocks during times of market stress and can therefore anchor your portfolio when stocks take a dip.’
Jason Hollands recommends TwentyFour corporate bond fund, which focuses primarily on investment grade bonds, but also invests in government bonds.
‘The fund has the flexibility to invest up to 20 percent in riskier, high-yield bonds (issued by companies with less financial strength). In practice, however, these currently represent only 6.4 percent of the fund.
“The latest return on the fund is inflation and cash at 6 percent, with distributions to investors made on a quarterly basis.”
Cheap investment funds offer attractive returns
Investment trusts also offer income opportunities because, unlike open-end funds, trusts can retain up to 15 percent of their investments and use this to supplement dividends in future years.
City of London Investment Trust is unrivaled when it comes to payouts and has increased its dividend for 58 years in a row.
Jason Hollands is in favor of two long-standing investment funds
Coatsworth says: ‘City of London Investment Trust offers a mix of value and income for its investment style. Its annual charges of 0.37 per cent are among the lowest in the UK equity income space and a 5 per cent yield is higher than that of the FTSE 100, which offers 3.9 per cent.
‘You can understand why this trust is so popular with investors given these higher returns, with City of London regularly one of the most purchased investment trusts on the AJ Bell platform.’
Hollands advises Murray Income Trust which has “delivered consistent long-term performance, especially in weaker market conditions.”
It has increased its dividend every year since 1973 and has a current dividend yield of 4.6 percent.
He also advises Temple Bar Investment Fundmanaged by value investors Nick Purves and Ian Lance.
“With the UK market currently unloved and valuations very cheap compared to global equities and the long-term trend, this is exactly the kind of environment that presents incredible opportunities for the team.”
Trusts that focus on alternative assets such as renewable energy, shipping and supermarkets can also provide a reliable source of income, says McDermott.
‘Many of these trusts are currently trading at significant discounts to their net asset value, despite still offering an attractive and stable dividend, presenting an exceptional opportunity for investors.’
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