The past decade has been a difficult one for income-seekers. With central bank interest rates still near rock bottom levels, investors have had to move up the risk scale to earn an income that outstrips inflation.
High demand for gilts and corporate bonds has driven yields on these traditional income investments down and a spate of dividend cuts means equity markets provide no guarantee of a reliable income.
For those investors who need a steady income stream, diversification is key. Investors should consider incorporating a range of assets and regions in their portfolios to provide protection. We round up some of our analyst-rated income fund picks:
Artemis Monthly Distribution
With a yield of 4.1%, the Silver-rated Artemis Monthly Distribution fund could be a valuable holding in an income investor’s portfolio. The £994 million fund has been managed by Jacob de Tusch Lec and James Foster since launch in 2012.
While de Tusch Lec’s Global Income fund has recently been downgraded by Morningstar analysts to a Neutral rating, his input on the equities part of this portfolio is still key. Indeed, Morningstar analyst Rajesh Yadav says the manager has “proved his stock-picking skills over time”. The fund sits in the Investment Association’s Mixed Investment 20-60% Shares sector, meaning it aims to strike a balance between delivering a reliable income and modest capital growth.
Around a third of the portfolio is invested in US assets ranging from Treasury bonds to shares in telecoms giant Verizon. The fund has produced annualised returns of 6.8% over the past five years and is up 10% year to date. Yadav says it is a solid choice for investors, with experienced managers at the helm and an investment process that has been proven over time. He adds: “We like that the two managers have worked well together over time, by capturing the best elements of their distinctive approaches to fit the requirements of this strategy, which has served investors well.”
Fidelity Global Dividend
A talented fund manager and sensible investment process underpin analysts’ conviction in the Bronze-rated Fidelity Global Dividend fund. Daniel Roberts has run the fund since its 2012 launch and delivered an impressive 13.2% annualised return over the past five years.
While the headline yield is nothing to write home about at 2.5%, its investments in defensive dividend payers such as Unilever and British American Tobacco should mean the fund can grow its pay out over time. A fund’s ability to grow its dividend is a crucial part of income investing as it helps investors keep pace with rising living costs.
Morningstar analyst Jeffrey Schumacher rates the manager for his in-depth, bottom-up research process – Roberts focuses on companies with predictable, consistent cash flows and easy-to-understand business models. That leads him naturally to many companies with an economic moat, as assessed by Morningstar equity analysts. Among the fund’s top holdings are pharma giant Pfizer, oil firm Royal Dutch Shell and Germany’s Deutsche Boerse.
Schumacher adds: “The fund has been a solid performer since inception and its track record has been built on generating outperformance in more difficult markets, while also keeping up in strongly rising markets.”
Franklin UK Equity
With the FTSE currently yielding more than 4%, it’s no surprise that the UK is a ripe hunting ground for income investors. The Silver-rated Franklin UK Equity Income fund aims to deliver a greater income than the FTSE All-Share, as well as delivering capital growth. Currently the fund is yielding 4.5% and it has also delivered a sizeable 10.5% annualised return over the past 10 years.
Big British blue-chips make up the largest positions in the portfolio – names such as BP, GlaxoSmithKline and AstraZeneca will be familiar to UK income investors. But manager Colin Morton also blends in higher-yielding stocks and companies he believes are undervalued, with recent examples including Greggs and Dunelm.
Morton considers the economic outlook and stock market dynamics as well as share price valuations when he is making his stock selections. Morningstar analyst Samuel Meakin likes the manager's focus on companies with competitive positions within their industries and those which have strong balance sheets, which should ensure their dividends are sustainable. The fund’s annual charge is just 0.55% and Meakin says that this, “combined with the highly experienced manager and consistency of approach over time, makes the strategy a very strong core option in a competitive sector.”
