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An Income portfolio targets Income investments in equities that pay a dividend. When this dividend is re-invested to buy more of the underlying stocks you get a ‘compounding‘ effect on your investment returns.
It's a decent traditional strategy for building wealth over the longer term, but numbers have been crunched when comparing to a standard diversified global stock portfolio and over the longer term, the standard global portfolio provides better returns.
Traditionally, in the UK, the pig income paying FTSE100 stocks have been used for retirement income. The FTSE100 mega caps are huge global companies, so you can argue that you are actually buying a global fund when you buy the FTSE100. Globally diversified revenues serve to de-risk retirement pots.
It has worked for many UK investors in the past, but it's seen as just the traditional way of doing things in the UK by investors these days.
How Could these investments help in a downturn?
How Could these investments help in a downturn?
The price of a stock might go down, but if it’s a good dividend payer it will, for the most part, pay that dividend during downturns, so at least you are getting paid. Eventually, the stock price for a decent income paying stock will recover and trend higher over the longer term. In addition, when re-investing dividends you effectively buy more of the same stock if the share price is decreasing. In the future when things turn up again you have an amplified compounding effect from owning more of the same dividend-paying stock.
Whilst it is true that income paying stocks can see investment ‘inflows’ that support the share price during a downturn, its still the vase that their share price will still decline in a bust, just maybe not sa violently as other types of stocks.
Income ETF’s & Index Funds
Income ETF’s & Index Funds
The low-cost Index and ETF funds below are a selection of well known, large, liquid dividend ETF's with either a UK, US, or global focus. (See the "Regions Invested" column). The risk column gives the industry standard risk score which measures volatility.
(Some have been estimated "est" - in the risk column if I did not have the risk for the ETF, but the risk is pretty much the same in this asset class of ETF's so isn't really a deciding factor between the funds.)
The yields were current at the time of writing. The OCF is the fee taken by the fund provider. Most are pretty low. The yearly returns are Total returns with income reinvested, but as ever past returns don’t necessarily equate to future returns.
The green rows below show the ETF's that were out-performing in 2020 in terms of the cumulative 5 year performance. The red rows highlight underperformers for the time period given. However, The usual disclaimer applies here... "past performance is not an accurate measure of future performance". The US and Global ETF's outperformed their UK counterparts because the US outperformed during this period
Performance of VHYL pretty mirrors the IA Global Equity Income Index, so it's a good way to track that index. Over 3 years or so VHYL has underperformed the two funds below as well as a standard global world tracker such as HSBC MSCI WORLD ETF which incidentally has similar performance to the two funds below.
Wisdom Tree use their own methodology/Index but due to this has quite a high Price/Earning ratio (19 odd). Always always consider P/E as a measure of value before investing. It's usually a good measure of future returns. Overall I would probably still favour this Wisdom Tree fund over VHYL or Van Eck as it avoids the riskier stocks such as Tesla and it has consistently outperformed VHYL and the Van Eck fund.
Income Funds based on US stocks (or other foreign stocks) will be subject to exchange risk based on the prevailing rate of exchange between pounds Stirling and the base currency the stocks are held in. This is one of the main reasons income seekers often opt for dividend funds domiciled in their own country, or that hold securities and stocks in their own currency.
Below is a selection of some of the main UK and global dividend based ETF's on market.
UK Funds
UK Funds
Vanguard FTSE 100 UCITS ETF (VUKE)
This fund tracks the performance of the FTSE 100 Index, a globally recognised UK benchmark of the UK market’s most highly capitalised blue-chip companies.
Over the longer term, this investment should provide low-cost access to a decent dividend income.
Yield is decent at nearly 6% at the time of writing. (However, this may be higher due to the Coronavirus crisis)
The link above takes you to the Vanguard platform but this fund is available in all major online brokers. YouInvest/AJBell Total Expense Ratio (the cost to invest) is 0.09%. This is a quality low-cost FTSE 100 tracker.
YouInvest/AJBell investment platform link: CLICK HERE (opens new tab)
Artemis Income Fund (via Hargreaves Lansdown)
If you are a Hargreaves Lansdown customer, or prefer unit trusts, this ‘Unit Trust‘ fund mainly invests in large UK companies, but may also invest in some medium-sized and overseas companies when they find good opportunities. They target companies that can grow profits and cash flow supporting those all-important dividend payments.
Adrian Frost is one of the UK’s most experienced equity income managers. He’s built an ambitious team of income investors around him. A disciplined focus on companies able to pay consistent dividends.
This fund is in the Hargreaves Lansdown Wealth 50 recommended funds which means they thoroughly researched the fund and given it the highest seal of approval.
There is a decent dividend yield of 5.71% (at time of writing)
The benefits specified above are available at low ongoing net cost on the Hargreaves Lansdown platform (website) of just 0.59% (at time of writing)
You can view the out-performance of this fund compared to the FTSE All-share in the link below. The fund can be invested in by opening an account with Hargreaves Lansdown via the following link which goes straight to the Artemis fund page (Disclaimer: I am not a financial advisor making a recommendation based on personal circumstances):-
HARGREAVES LANSDOWN PLATFORM LINK: CLICK HERE (opens new tab)
Vanguard FTSE U.K. Equity Income Index Fund
This UK ETF focusses on providing a higher yield and sports a low OCF cost of ownership. Unlike Vanguards other main FTSE 100 fund (VUKE) it offers an accumulation option so you beneit rom reinvested dividends without having to do it yourself.
IShares UK Dividend ETF Fund (IUKD)
This UK ETF focusses on forecast yield unlike most other UK Dividend ETFs.
Global & Emerging Market Funds
Global & Emerging Market Funds
Vanguard FTSE All-World High Dividend Yield UCITS ETF (VHYL) is made up of large and mid-sized stocks, excluding real estate trusts, in developed and emerging markets with higher than average dividends. This fund also filters on forecast Dividend yield as opposed to the backward looking historic yield.
US Funds
US Funds
The US Dividend fund market is the most advanced in the world with a wealth and diversity of choices...
SPDR S&P US Dividend Aristocrats ETF - USDV - (A UK-listed ETF tracking the S&P High Yield Dividend Aristocrats Index. This index comprises stocks within the S&P Composite 1500 Index that have increased their dividends every year for at least 20 consecutive years.)
iShares Core High Dividend ETF (HDV) The iShares Core High Dividend ETF (NYSEARCA:HDV). This ETF follows the Morningstar Dividend Yield Focus Index, which screens companies for financial health, giving the fund a quality bias. With an annual fee of just 0.08%, HDV is one of the cheaper high dividend ETFs on the market today. That low fee coupled with its sector allocations make HDV ideal for conservative investors. The healthcare, consumer staples, telecom and utilities sectors, four of HDV’s top five sector weights, can all be considered defensive groups.)
SPDR S&P Dividend ETF (SDY) - 117 div aristocrats - companies that increase their divs for at least 20 consecutive years and weights the stocks by yield
Vanguard High Dividend Yield Index Fund ETF (NYSEARCA:VYM) With $26.8 billion in total net assets, the Vanguard High Dividend Yield ETF is one of the largest dividend ETFs around. VYM avoids rate-sensitive sectors. There is no real estate exposure and the bond-esque telecom and utilities sectors combine for just 14.5% of VYM’s weight. Nearly a quarter of the fund’s holdings are in the industrial and healthcare sectors. Financials is this high dividend ETF’s largest sector at 18.5%.
Factor-based Dividend Funds
Factor-based Dividend Funds
In todays increasingly sophisticated investment fund universe you can mix overall fund categories (growth or dividend) for example, with a 'factor' bias such as 'quality' or 'value'. One such example below focuses on dividend payers with a Quality bias...
Fidelity Global Qual Inc ETF Inc
This Fidelity ETF has a Morningstar Analyst Rating of Silver, and pays dividends to investors on a quarterly basis. At the time of writing, the ETF has beaten its Morningstar Global Equity Income category and the benchmark, the MSCI World High Dividend Yield index.
“Fidelity Global Quality Income ETF is a solid choice for investors seeking to harness the potential of dividend investing,” Morningstar passive funds analyst Dimitar Boyadzhiev. "The fund is well diversified and competitively priced."
US equity in the portfolio is 66% weighting. US companies responded to the 2020 coronavirus dividend crisis by reducing share buybacks rather than cutting dividend pay-outs. This is in contrast to their European counterparts, who cancelled and cut billions in pay-outs. US banks were also allowed to continue making payments, whereas UK and EU regulators froze dividends for a number of months although the coronavirus reaction is possibly a one off, who is to say that something similar can't happen again, or if there will be wars etc. This is one of the problems with dividend investing full stop.
The largest holdings in the ETF are tech giants Apple (AAPL) and Microsoft (MSFT) with weightings of 3.5% and 3.2% respectively, and the fund holds more tech and fewer consumer defensive stocks than its peers.
Another Quality factor Global Dividend ETF worth a mention is the Wisdom Tree Global Quality Div Growth ETF (GGRP). Compare it to the Fidelity ETF above to see if you can spot any differences.
Income Investment Trusts
Income Investment Trusts
The top trusts standing at a premium to NAV are dominated by specialist sectors such as renewable energy and infrastructure or specialist real estate. The draw with these trusts is that they are not highly correlated to global equity markets and produce high levels of income.
There are certain nuanced risks with regards to buying trusts at premium/discount to NAV. Any retail (DIY) investor thinking of doing this should read this page. For most investors, they won't make a difference to long term returns compared to a standard globally diversified ETF so there isn't much point in going down this kind of investing route in reality.
Well Known UK Investment Trusts
Well Known UK Investment Trusts
The investment trusts below represent a cross section of the most well known trusts in the UK. Many have been growing their dividends in consecutive years for decades. For example, the City of London trust has increased dividends for the past 53 years. Those trusts that maintain this philosophy will have ample reserves to keep paying a yield when their ETF or Index fund cousins would be cutting dividends if there was some kind of crisis in which dividends can be cut.
Bankers (BNKR) and Alliance Trust (ATST) boast 53 years of consecutive dividend growth, while others with long dividend growth records include F&C Investment Trust (FCIT) with 49 years growth and Brunner (BUT) with 48 years. These trusts had in excess of the total cost of one year’s dividend in their reserves.
A highly respected Income Investment Trust is Murray International (MYI). Typically with a high dividend yield, MYI has substantial revenue reserves. MYI has a bias to overseas equities and offers exposure to bonds too.
Its Global Equity Income peer Scottish American (SAIN) has racked up 40 consecutive years of dividend growth, with revenue reserves of £17.3m and cover of 1x. For the Global Equity Income sector.
And although a whole heap of covid-19 inspired dividend cuts or deferrals from UK companies created nervousness around the UK Equity Income sector’s ability to sustain dividends during the pandemic, the top four Investment trusts by highest revenue reserves cover were: -
Law Debenture (LWDB)
Shires Income (SHRS)
Chelverton UK Dividend (SDV)
BlackRock Income & Growth (BRIG)
In theory, the high revenue reserves cover may mean they are at less risk of dividend payment reductions during a crisis.
The following investment trusts (with links to Morning Star/Trustnet) have been recommended from good sources. Check out the “Morning Star” and “Trustnet” ratings and reviews for each (Yields below quoted at time of writing):-
Murray Income Trust Plc (MUT) – Morning Star Rating: 5 stars – Ongoing Charge 0.66% – Yield: 4.46% – CLICK HERE
Murray International Trust Plc (MYI) – Morning Star Rating: 2 stars (but has a MS Silver Rating) Ongoing Charge 0.61% – Yield: 5.14% – CLICK HERE
Dunedin Income Growth Investment Trust (DIG) – Morning Star Rating: 5 stars – Ongoing Charge 0.59% – Yield: 4.76% – CLICK HERE
Law Debenture Corporation (LWDB) – Morning Star Rating: 3 stars (and a Silver Rating) – Ongoing Charge 0.3% – Yield: 4.85% – CLICK HERE
Witan Investment Trust (WTAN) – Morning Star Rating: 2 stars (but has a MS Bronze Rating) – Ongoing Charge 0.83% – Yield: 3% – 45-year record of dividend increases – strategic approach to picking global stocks – CLICK HERE
BMO Managed Portfolio Trust (LSE: BMPI) – Yield: 5.4% – includes healthcare as well as alternative income funds along with infrastructure funds
Income Diversification – Infrastructure
Income Diversification – Infrastructure
Infrastructure funds and ETFs benefit from increases in government spending on improving infrastructure. However, government spending packages can be difficult to pass, especially in contentious political environments so there is still risk in the infra sector.
Renewable energy trusts have also been driven to a premium by a surge in investor interest – these trusts make an income by selling the energy they generate through solar panels and wind turbines. The UK we have NextEnergy Solar (NESF), Greencoat UK Wind (UKW), and Bluefield Solar Income (BSIF). These are specialist funds and are simply not suitable for most investors unless they are advised by specialists in this sector. And as ever with investment trusts you always have to be worries about buying or selling at premium or discount to NAV (see below). It's too much hassle.
Overpaying for an investment trust can be a problem. Ideally, you want to buy trusts trading at a discount to their net asset value (NAV). In that ideal world, you then get income and NAV growth and have the potential to make gains if the discount closes. The catch is that there is often a good reason that a trust trades at a discount, such as a record of poor performance. So, as ever, only professional investors are qualified to pick these discounted trusts. Some investment trusts specialise in picking other investment trusts trading at a discount.
The 4 trusts below are the more well known UK investment trust options for Infrastructure.
3i Infrastructure (LSE: 3IN)
BBGI (LSE: BBGI)
HICL (LSE: HICL)
International Public Partnerships (LSE: INPP).
These specialist, defensive funds invest in everything from heavily regulated PFI projects to more volatile economic infrastructure (electricity grids and broadband provision). An average of 4.8% in government backed cash flows hasn’t completely protected them from market volatility but they are quality income alternatives.
Commercial Infrastructure Funds: - Urban Logistics (SHED). This specialised class of Infra is more cyclical than the standard infra funds above, but offers up good yields and can provide 'risk-on' income diversification with a UK bias. These funds whilst seemingly safer still experience volatility so should only be considered by most investors if they are being advised by a professional investor or advisor.
Individual Income Stocks?
Individual Income Stocks?
The links below will take you to some individual stock picking dividend strategies I looked at initially on my investing journey, but I soon realised that this route is labour intensive and frankly just aren't worth the effort. For most investors just investing in a core globally diversified fund is the standard way to go.
The Times Top 30 Value Dividend Kings – CLICK HERE (new tab)
The Usual Dividend Kings Suspects – CLICK HERE (new tab)
Do Dividends Actually Matter?
Do Dividends Actually Matter?
There is a school of thought (and quite a learned school of thought) that advises investors not to worry about income/dividend investing as it is not a true determinant in stock market returns: -
Don't Forget High Interest Savings Accounts and Money Market Funds
Don't Forget High Interest Savings Accounts and Money Market Funds
When Inflation rises too high prompting banks to raise interest rates, as was seen in the global 2022/23 inflation spike, risk free savings accounts and Money Market funds start to become attractive options. I am personally invested in the following two well known. large money market funds: -
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