For those who need that income to live on, building a portfolio that pays out monthly is highly desirable. One that generates its dividends from a number of different sources is even more attractive, as it ensures that an investor’s income stream is diversified, and not totally reliant on a single asset class performing in line with expectations.
This is especially important at the moment, given the high level of correlation in the markets. In the aftermath of chairman of the Fed Ben Bernanke’s comments regarding QE tapering early this year, most of the major asset classes fell, illustrating the importance of high levels of diversification.
Performance of indices over 3months
Source: FE Analytics
One way to do this is by investing in a multi-asset fund that pays out a dividend monthly, though products such as these are few and far between.
Most are invested almost exclusively in bonds and equities, which some experts claim is an outdated way of investing, as they don’t give investors adequate diversification. These include the likes of Jupiter Monthly Income.
However, there are a handful that get their income stream from many asset classes. A good example is the five crown-rated Premier Multi Asset Monthly Income fund – a fettered fund of funds that has major stakes in developed equities, emerging markets, bonds, property, infrastructure and alternative assets including hedge funds.
The £36m fund, which is currently yielding 4.26 per cent, pays out a dividend on the first day of every month.
On a total return basis, it has significantly outperformed its IMA Mixed Investment 20%-60% Shares sector average – which is also its benchmark – since its launch in January 2009, albeit with slightly more volatility.
Performance of fund vs sector since launch
Source: FE Analytics
The yield of 4.27 per cent is well above average for its sector, and higher than the average UK Equity Income and Global Equity Income fund.
David Hambidge’s fund is available for a minimum investment of £1,000 and ongoing charges of 2.26 per cent. Top-10 positions include the likes of Schroder Income Maximiser, M&G European Loan and the Real Estate Credit Investment Trust.
Henderson’s three Core Income funds are very similar to Hambidge’s, but are yet to achieve a one-year track record.
Bambos Hambi’s range of Standard Life MyFolio MultiManager Income funds offer a similar service, but only pay out income quarterly. It’s the same story with JPM Multi Asset Income, which FE Trustnet profiled in a recent article.
Given the limited number of multi-asset income funds that pay out a monthly income, investors may instead choose to build a portfolio of funds themselves. Here, we give an example of one that generates a regular income stream with a high level of diversification.
Monthly income funds
One way investors could ensure that they have a diversified regular income stream is by holding a selection of UK monthly income funds from different asset classes.
The standout option in the bond market is arguably Paul Causer, Paul Read and Neil Woodford’s five-crown rated Invesco Perpetual Monthly Income Plus fund, which again pays out a dividend on the first of every month.
This £3.8bn fund sits in the IMA Strategic Bond sector, drawing on its income from the corporate and government bond markets, as well as from equities – albeit to only a limited extent.
Its currently yielding 5.62 per cent, which is very high for the sector. This, combined with a decent generation of capital growth, has led it to the top quartile of its peer group over one, three, five and 10 years.
Invesco Perpetual Monthly Income Plus requires a minimum investment of £500 and has ongoing charges of 1.43 per cent.
There are a number of monthly income options in the equity market, including the five-crown rated Threadneedle UK Monthly Income fund, which has been headed up by Jonathan Barber since 2002.
Monthly income funds
| Fund | Number of dividends a year | Yield (%) | FE Crowns |
|---|---|---|---|
| Invesco Perpetual Monthly Income Plus | 12 | 5.62 | 5 |
| Threadneedle UK Monthly Income | 12 | 3.8 | 5 |
| Ignis UK Property | 12 | 3.2 | 2 |
Source: FE Analytics
The £573m portfolio pays out on the 8th of every month and is currently yielding 3.8 per cent – just over the rate offered by the All Share.
The fund is not as dominant as the Invesco Perpetual bond fund mentioned above, but it has consistently beaten its UK Equity Income sector average and FTSE All Share benchmark over three, five and 10 years.
Threadneedle Monthly Income requires a minimum investment of £2,000 and has ongoing charges of 1.62 per cent.
There are only two funds in the IMA Property sector that pay out a monthly income, Ignis UK Property and Royal London UK Property, but only the former is readily available to retail investors. Both are currently yielding 3.5 per cent, and have two FE crowns.
The Ignis fund is headed up by George Shaw, and has around £1bn under management. It invests in physical properties predominantly in London and the south east, but also has significant exposure to the rest of the UK, including Scotland and Wales.
Shaw has retuned just over 14 per cent since its launch in late 2004, meaning it has recovered the majority of losses it sustained during the crash of 2007 and 2008. It has no recognised benchmark.
The fund is available for a minimum investment of £500 and has ongoing charges of 1.51 per cent.
Aside from these three areas, it is very hard to find monthly income funds. As a result, it is definitely worth adding a selection of funds that provide your portfolio with a greater level of diversification throughout the year. Here are some you may want to consider
March, June, September and December
The most popular way to diversify an income stream is through a global equity income fund.
There are a number of top-rated vehicles in the IMA Global Equity Income sector, including the four-crown rated Threadeedle Global Equity Income fund, which is headed up Stephen Thornber and pays out a dividend on the last day of the month in March, June, September and December.
Threadneedle Global Equity Income is currently yielding 4.1 per cent, making it one of the most attractive options in the sector. It has also consistently beaten its sector and benchmark on a total return basis; our data shows it has returned 52.73 per cent since its launch compared with 36.92 per cent from the IMA Global Equity Income sector, and 41.02 per cent from the MSCI World index.
The fund requires a minimum investment of £2,000 and has ongoing charges of 1.73 per cent. It only has 16 per cent in the UK currently, making it a good option for those looking to diversify away from the UK in particular.
February and August
Two stand-out infrastructure funds pay out a dividend in the months of February and August – First State Global Listed Infrastructure, and the 3i Infrastructure trust, which currently have a yield of 3.02 and 4.82 per cent, respectively.
Both the fund and trust invest in listed equities that are involved in the infrastructure industry, and have had a very good run since the depths of the financial crisis, with low volatility.
Performance of fund and trust over 5yrs
Source: FE Analytics
Infrastructure is seen as a good diversification play for income investors, though demand has pushed valuations to historic highs. The 3i Infrastructure trust is currently on a premium of close to 13 per cent.
The 3i trust has a particularly low correlation to the UK equity market – 0.01 over a three-year period, for example – but the First State Infrastructure fund has a much higher correlation, at around 0.7 per cent.
3i Infrastructure has ongoing charges of 1.79 per cent, while the First State fund charges 1.62 per cent.
May and November
Nigel Ashfield’s Freehold Income Authorised fund is an interesting income play, with one of the most consistent distribution yields of any in the IMA universe in recent years.
The fund attempts to provide a secure and stable return primarily through acquiring freehold ground rents which offer an attractive income stream and capital growth prospects. It currently has a target yield of 4.25 per cent after charges, but the yield is slightly higher than this at present.
It has an unbroken track record of positive returns over 18 calendar years and has consistently outperformed cash, gilts and inflation over these periods.
Performance of fund and indices since launch
Source: FE Analytics
Ashfield’s fund pays out a dividend on 20 May and November every year.
Freehold Income Authorised is a regulated PAIF [property authorised investment fund], but is currently only available if you’re investing through a professional adviser.
The £156m fund requires a minimum investment of £5,000 and has ongoing charges of 1.45 per cent.
January, April, July, October
Commodities remain an out-of-favour asset class at the moment following more than two years of acute underperformance; however, for long-term investors who want to diversify their income stream, a dividend-paying commodities fund is a worthwhile option.
The highest-profile fund that falls into this category is closed-ended – the BlackRock Commodities Income trust, headed up Richard Davis.
The £118m portfolio is currently yielding 5.3 per cent and pays out a dividend in January, April, July and October.
Davis has held up far better than the vast majority of commodities managers of late, making money over one, three and five years. By contrast, the FTSE 350 mining index is down at least 7 per cent over all three periods.
The trust is on a slight premium, and has ongoing charges of 1.29 per cent.
