Monthly income investment selections
Whether investing inside or outside of an ISA, the hunt for income remains a top priority for many investors, as evidenced by the number of our existing customers and those new to Fair Investment looking for income solutions. With the frequency of payments one of the most important features for many income seekers, we have put together a selection of our most popular monthly income investments. We also give you our in-house view of each from Oliver Roylance-Smith, our Head of Savings and Investments. For those who are yet to use their ISA allowance, all of the investments featured are also available within an ISA so you could benefit from tax free income.
Income a top priority
Whether you are an experienced investor or new to saving for the future, those needing income from their capital covers a wide range of scenarios, some of which may apply to you right now:
- I am working and need to supplement my income
- I am retired and need an income from my savings
- I have an instant access Cash ISA but the level of interest has dropped significantly
- I have an Investment ISA that is not yielding what it used to
- I have a maturing fixed rate Cash ISA and the equivalent rate for the same term again is significantly lower
- I am struggling to find a fixed and regular income from my capital which is competitive
Both savers and investors
With cash continuing to offer record low rates, even if you tie yourself in for the longer term, many savers are being driven to join income investors in the hunt for higher yields. What is clear is that regardless of the prevailing economic conditions, income remains a top priority for both savers and investors.
Although many income investors have historically looked to UK Equity Income funds to provide an
income, with typical yields on these funds currently under 4%, this may not be providing the level of income required and investors may well be questioning whether capital growth will do enough to boost their overall returns.
When reviewing the options available, those seeking income from their capital often take into consideration the level of income on offer, the frequency of payments as well as the overall risk versus reward offered by the investment. But with equity funds only offering quarterly income at best and many only paying twice each year, monthly income investments have an obvious appeal for those after a regular income.
Our selection of income investments is based on the main features investors usually look for when it comes to finding the best income opportunities available. From high levels of fixed income paid regardless of the performance of the stock market, to high yielding bond funds which diversify your investment across a large number of holdings, all of them have one thing in common – monthly income.
The Enhanced Income Plan from Investec continues to be one of our best sellers for those investing both inside and outside of an ISA. One of the main appeals for income seekers is that the income is fixed and therefore paid to you regardless of the performance of the FTSE – you therefore know exactly how much you will receive, when and for how long. The annual income is currently 5.40% (paid as 0.45% each month) which is high when compared to typical yields currently being paid by UK equity income funds. Capital is at risk if the FTSE drops by more than 50% during the plan and fails to recover by the end of the term, in which case your initial capital will be reduced by 1% for each 1% fall, so you could some or all of your initial investment.
Fair Investment view: “5.40% tax free income (if held in an ISA) is the equivalent of 6.75% taxable income for a basic rate tax payer and 9.00% for a higher rate tax payer. This high level of fixed income and the monthly payment frequency are popular features and with ongoing uncertainty around future interest rates and dividend yields, this plan offers a competitive balance of risk versus reward that could be considered by both savers and investors.”
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The second income plan in our selection also offers a fixed income, paid to you regardless of the performance of the stock market. The FTSE 5 Monthly Income Plan from Meteor offers 7.20% annual income, paid as 0.6% each month. This level of income is significantly higher than Investec’s plan, one of the main reasons being that the return of your initial capital is dependent on the performance of five FTSE 100 shares rather the Index as a whole. Should the value of the lowest performing share be less than 50% of its value at the start of the plan, your initial capital will be reduced by 1% for each 1% fall, so you could lose some or all of your initial investment.
Fair Investment view: “The fixed income on offer equates to a total return of 43.2% over the term of the investment and if you invest within an ISA, the 7.20% fixed income is equivalent to 9.00% p.a. for basic rate tax payers and 12.0% p.a. for higher rate tax payers. This investment might well appeal to income investors looking for a high level of fixed and regular income however, the fact that the return of your initial capital is based on the performance of five shares rather than the Index as a whole should be a key consideration.”
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This fund was launched in 1999 and is now almost £800 million in size. At 6.40%, the fund currently has one of the highest distribution yields* in the high yield sector and the monthly income frequency seems to be the favoured choice for our income investors, especially those looking to supplement income. The fund is managed by Barrie Whitman (since launch) and David Backhouse and has the simple aim of providing income. The fund invests at least two thirds of its assets in high income paying bonds issued by companies worldwide with the top three sector holdings covering media, services and telecommunications.
Fair Investment view: “The total number of bond issuers in the fund is currently 162 and the fund has produced a cumulative return of 7.4%, 23.3% and 56.9% over the last one, three and five years respectively. The high yield is achieved by investing predominantly in sub-investment grade bonds which are considered riskier than higher rated bonds but typically pay a higher income and so investors will experience some volatility. The fund is well diversified and is currently overweight in both banking and the European high yield market. The fund is Bronze rated by Morningstar OBSR.”
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Invesco Perpetual’s Monthly Income Plus fund has been popular with income investors for many years. Launched in 1999, the current management is split between Paul Causer, Paul Read and Ciaran Mallon who together have secured a Morningstar OBSR Silver rating. Now almost £4 billion in size, the aim of the fund is to achieve a high level of income together with capital growth over the long term by investing primarily in corporate and government high yielding debt securities globally as well as equities (up to maximum of 20%).
Fair Investment view: “Of the 382 current total number of holdings, just under 40% are with investment grade institutions with 16.75% of the fund invested in equities. The fund has produced 7.30%, 35.42% and 64.54% over the last one, three and five years respectively, outperforming its sector by some margin. It has a current distribution yield of 4.60% which is relatively low compared to the funds historical performance however the fund continues to be very popular with income seekers.”
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The two funds featured are open-ended collective investment funds which offer investors the ability to pool their money with others in order to invest in a large number of holdings, thereby diversifying their risk and accessing a far greater spread of holdings than would be available if investing directly. This offers savers another way of gaining access to the potential for higher income than available from cash.
The two fixed income investments are fixed term investment plans. These are an alternative to open ended investment funds, offering a defined return for a defined level of risk, thereby giving investors a further option to achieving income for their capital.
Investment plans versus investment funds
It is important to remember that income yields from investment funds are not guaranteed and are therefore subject to fluctuations. In addition, the treatment of your capital is different –fixed term investment plans contain what is known as conditional capital protection which means your initial capital is returned at the end of the plan term unless the underlying investment (either the FTSE 100 Index or five shares listed on the Index) has fallen by 50% or more. With investment funds your capital is fully at risk on a daily basis albeit your investment is spread across a large number of holdings, thereby diversifying the impact of one bond issuer failing.
Understanding how and when income is paid, as well as the treatment of your initial capital over time, are important considerations. The income yield as well as any rise or fall in the value of your original capital should always be considered together since both have an effect on your overall return. For example a 7% income yield might be compelling in its own right but not so if it coincides with a 7% reduction in the value of your capital. However, the total return can also work in your favour if capital growth is positive.
* the distribution yield reflects the amounts that may be expected to be distributed over the next twelve months as a percentage of the Fund’s net asset value per share as at the date shown. It is based on a snapshot of the portfolio on that day. It does not include any initial charge and investors may be subject to tax on distributions. Past performance is not a guide to future performance. All fund data correct as at 31/07/2014.
No news, feature article or comment should be seen as a personal recommendation to invest. Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular investment. If you are at all unsure of the suitability of a particular investment, both in respect of its objectives and its risk profile, you should seek independent financial advice.
Tax treatment depends on your individual circumstances and is based on current law which may be subject to change in the future. Always remember to check whether any charges apply before transferring an ISA.
The value of investments and income from them can fall as well as rise and you may not get back the full amount invested. Different types of investment carry different levels of risk and may not be suitable for all investors. Past performance should not be taken as a guide to the future and there is no guarantee that these investments will make profits; losses may be made.
The investment plans detailed are structured investment plans which are not capital protected and are not covered by the Financial Services Compensation Scheme (FSCS) for default alone. There is a risk of losing some or all of your initial investment. There is a risk that the company backing the plan or any company associated with the plan may be unable to repay your initial investment and any returns stated. In addition, you may not get back the full amount of your initial investment if the plan is not held for the full term. The past performance of the FTSE 100 Index or any shares listed within the Index is not a guide to future returns.