By Jeff Salway
Scotland on Sunday
Sunday 27 November 2011

Income has long been considered the Holy Grail of investing, and never more than now as inflation-hit savers increasingly turn to equities.

Yet while hundreds of funds and trusts promise to pay a regular income, tracking down those that really do over the long run is the challenge facing investors.

Inflation and low interest rates have had a devastating impact on cash savings over the last two years, and with the Bank of England likely to leave the base rate at 0.5 per cent for some time, the hunt for income will only intensify.

And if we're facing a decade of low growth, as many economists believe, dividends will come to play an even bigger role in total returns than they do now. The challenge for investors is to source those dividends without taking more risk than they can handle.

Alan Steel, chairman of Alan Steel Asset Management, said: "A lot of people are holding onto cash Isas because they regard them as low-risk investments, but with most Isas paying less than 1 per cent they are losing money. The best thing they can do is swap their cash Isa for a portfolio of income funds and get income of 5 per cent a month," said Steel.

"It's the best defence - income funds can protect your wealth while kicking out a nice regular income," he added.

That dividends are the biggest single component of investment returns, especially when reinvested year after year, is frequently overlooked. It is estimated that over any ten-year period, dividends account for at least 40 per cent of total returns from equities. During low-growth periods, that proportion can double.

The good news is that plenty of investment trusts and unit trusts are regularly paying above-average yields.

One in three investment trusts currently pays income of more than 3.2 per cent, above the FTSE 100's average yield, according to new figures from the Association of Investment Companies (AIC). Trusts in the property, UK and global income sectors are averaging dividend yields above 5 per cent a year, it revealed. …

…Investment trusts can maintain dividends regardless of market movements, as they can keep back reserves during the good years to ensure they can pay out during more turbulent times.

The top 40 investment trusts at least match the 4.7 per cent return currently paid by the most competitive cash option available, the top-paying five-year fixed rate bond.

The average property trust is producing a dividend of 7 per cent, with the Standard Life Investments Property Income trust among the top performers, at 7.8 per cent. With a discount of 8.2 per cent, the trust is among many with shares priced below the value of their holdings.

The next-best sector for yield seekers is UK high income, where trusts are averaging dividends of 6.6 per cent. The global high income and infrastructure sectors also average above 5 per cent.

In all, 34 trusts currently pay dividend yields of 5 per cent or above, with another two dozen yielding above 4 per cent….

…Trusts aren't alone in providing a consistent income. Hundreds of unit trusts or open-ended investment companies (OEICs) pay a regular income, including more than 100 in the UK equity income sector alone. And while that means the onus is on investors (or their advisers) to pick out the top funds - checking performance at websites such as www.iii.co.uk or www.trustnet.com - Steel believes there is as much value in income funds now as at any time in the last 25 to 30 years.

"Income funds such as those run by Rathbone, Invesco Perpetual and Neptune are all paying monthly dividends of 4 per cent or above, and with the prospect of rising income year after year."

With the promise of both capital growth and consistent income, UK equity income funds are popular with UK investors. They vary widely in terms of approach and performance, with a considerable gap between the best and the worst in the market.

High income funds - which prioritise income, as the name suggests - are currently paying yields of up to 8 per cent, with the Newton Higher Income and Marlborough UK Equity Income funds among those paying above 7 per cent….

…The sector houses some of the UK's most popular funds, not least the Invesco Perpetual Income and High Income funds run by Neil Woodford (who also manages the Edinburgh Investment Trust), and the Artemis Income helmed by Adrian Frost.

The latter is able to invest up to 20 per cent in non-UK companies, and that global appeal has changed the face of income investing in recent years.

As growth in developing economies continues to outstrip that in the developed world, more funds now specialise in finding income from companies around the globe.

One example is the M&G Global Dividends fund, which aims to invest in the world's top dividend-paying companies. "Companies must have 25 years of increasing dividends just to qualify for consideration for inclusion in the fund," said Steel.

He also likes the Newton Global High Income and the Invesco Perpetual Global Equity Income funds…

Quote courtesy of Scotland on Sunday
Sunday 27 November 2011