The best funds for monthly income

I was asked by the excellent Mark Bridge from The Times newspaper for my views on the best funds for monthly income. They formed part of his wider article 'The best financial products for income', which also looks at savings and current accounts. It is well worth a read. As an 80-20 Investor subscriber I share with you my full analysis, including the alternative assets that can provide a good source of monthly income.

Best funds for monthly income

When it comes to picking funds for income most investors will simply focus on funds with the highest yield figures. Yet what they are overlooking is that a higher yield figure equates to higher investment risk, almost without exception as the fund manager is having to take more risks to generate the higher yield.

If you look at the average yield on funds within the various sectors often associated with generating income they are

• Sterling High Yield Bond - 6.06%
• UK Equity Income – 4.07%
• UK Equity Bond & income – 3.46%
• Sterling Corporate bonds 3.42%
• Global Equity Income - 3.33%

That provides a benchmark of sorts for the average yields on offer.

In any event, investors shouldn’t just focus on the yield figures but also consider the growth in any income payments otherwise over the long term inflation will erode the real value of any income produced.

Bonds funds pay a fixed level of income and their payouts don’t tend to increase. So if you are after a growing income you need to look at equity Income funds. The problem for investors is finding a fund that pays monthly income as despite the demand there is not a lot of choice.

Best equity income funds for monthly income

For example take the equity income unit trust sector, of the 92 funds in the sector there only 6 that pay income monthly. And there are no global equity income funds paying monthly income.

For those looking for yield then a good starting point is Premier Monthly Income which has a current yield of 4.7% and pays monthly distributions. However, for the above average yield investors need to be comfortable with volatility in the capital value of their investment.

Yet, if you are investing for income then you shouldn’t obsess over the capital value as long as the fund provides a consistent and growing income stream and you are not panicked into selling if the capital value falls.

But those wanting more in the way of capital performance would be better looking at Threadneedle UK Monthly Income with a yield of 3.9%. As you’d expect, among the fund’s top holdings are pharmaceuticals and tobacco companies that have historically been reliable dividend payers. While you may sacrifice a little in terms of yield you gain in capital performance, the fund is up 3% over the last year compared with 0.08% for the Premier fund & -0.47% on the FTSE 100. But more importantly the fund has a good record of increasing its payouts year on year, which is key to beating inflation.

What about investment trusts?

With ongoing charges of around 1.6% for both of the aforementioned funds, investors might look to investment trusts as they are cheaper, with a number of reliable income payers among them. Unfortunately most investment trusts now pay quarterly.

The best bond funds for income

While bond funds don’t provide a great source of growing income it is reliable and a lot of funds pay monthly due to the underlying nature of the investments.

Those tempted by bond funds as a source of income, in particular high yielding funds, should look for defensively positioned funds as the general demand for yield has seen some companies of dubious quality issuing bonds to take advantage of the current low rate environment. I’d prefer a fund such as Kames High Yield Bond fund which is more defensively positioned than its peers yet still provides a respectable 4.34% yield and a reasonable ongoing charge of up to 1.29%.

If you are not bothered about your income being paid monthly then have a read of my analysis 'Are bonds funds a good source of income? If so which ones?'

The best managed fund - a one stop solution

If income investors want to buy just one fund with a mix of bonds and equities then FidelityMoneybuilder Balanced is an option. It is run by two top managers, both conservative in their approach, with Ian Spreadbury on the bond side and Michael Clark managing the equity exposure. The equity exposure (2/3 of the fund’s assets) boosts the overall yield to around 3.8%. Also for a managed fund it is keenly priced and available at just 1.02% ongoing charge. But in terms of total return the funds is a consistent top quartile performer (within the Mixed Investment 40%-85% Shares sector) and is up nearly 9% over the last year.

Alternative assets

It’s important to also to try and diversify your income streams and one way to do that is invest in alternative income producing assets. Again it's not easy but there are some options....

But income is not all about bonds and equities it is also now possible to invest in commercial property for income. Kames Property Income launched last year and aims to provide a target yield of around 6% a year, which it looks likely to achieve by its first year anniversary in March. By investing in commercial property in secondary locations (i.e. outside of prime central London) it’s able to produce such a yield. Commercial property is enjoying a renaissance and unsurprisingly the fund is up 5.6% since launch with a low level of volatility.

Finally, the M&G Episode Income fund which invests in equities (globally and not just in the UK), government bonds and corporate bonds as well as property (but only around 5% of its assets) is a truly diversified income play. The yield is not as exciting as some mentioned but at 3.35% it is still worth a look.

Tip to broaden your choice

If you put in a little more effort you could open up the universe of funds and unit trusts you could invest in. If you set aside one year’s income in cash (an income pot) and then invested the rest in funds to pay income into an account, you could use the cash on deposit to live. Then by the end of the following year the payouts from your portfolio of funds will have replenished your income pot. In that way you wouldn’t have to obsess over finding monthly income paying funds as you could use any income producing fund, even if it pays annually!

Also make sure you put as many income producing funds into an ISA wrapper to minimise any further tax liability.

 

(image by razvan ionut / FreeDigitalPhotos.net)

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