Three Monthly Income Investment Ideas
A key aspect to consider when choosing income investments is how often income is paid out. The most common payment frequencies are bi-annually, quarterly and monthly, with the more regular frequencies usually being the most popular since monthly income can be the most useful in terms of budgeting and is attractive when looking to supplement existing income. With the recent changes to pensions putting a spotlight on ways to generate to income from capital, and while savings rates continue to force many to consider taking on more risk with their capital, we take a look at what three monthly income investments have to offer.
Putting your ‘capital at risk’ – what does this actually mean?
In order to receive the potential for income returns that are currently far higher than those available from cash, the investor’s capital is put at risk. This means that although your income will potentially be higher, whether you receive a return of your original capital is dependent on the performance of the underlying investment, which can be shares, bonds, or a major index such as the FTSE 100 Index.
Investment funds put your capital at risk on a daily basis in line with any movement in the value of the underlying assets. Remember, it is the combination of both income and capital gains/losses that determine the overall return on your investment, not just the income headline rate on offer.
Another popular choice with our income investors are fixed income investment plans which usually contain some form of conditional capital protection. This means your initial capital is returned at the end of the plan unless the underlying investment (Index or shares) has fallen by more than a fixed percentage. This is normally set at 40% to 50% and in all cases is known prior to investing.
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 yield bond funds which diversify your investment across a large number of holdings, all of them have one thing in common – monthly income.
5.04% fixed income – Investec Enhanced Income Plan
The Enhanced Income Plan from Investec continues to be one of our best sellers. One of the main appeals for income seekers is that the income is fixed and so 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 5.04% (paid as 0.42% 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: “Anyone looking for a fixed income around the 5% mark will have limited options. The high level of fixed income and the monthly payment frequency on offer from this plan 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.”
7.50% fixed income – Meteor FTSE 5 Monthly Income Plan
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 7.50% annual income, paid as 0.625% 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 37.5% over the term of the investment and has been particularly popular with our ISA investors since if held within an ISA, there is no tax to pay on the income. The plan might also appeal to 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.”
4.99% yield* – Kames High Yield Bond fund
Launched in 2002 and now over £1.5 billion in size, the Kames High Yield Bond offers the opportunity to receive a monthly income with a current distribution yield* of 4.99%. The primary investment objective of the fund is to maximise total return (income plus capital) by investing in a portfolio of predominantly high yield bonds, selected investment grade bonds and cash. Managed by Philip Milburn and Claire McGuckin, the main sector focuses are communications, consumer and energy with the majority of the 135 holdings within the fund with B rated credit institutions or above.
Fair Investment view: “The fund has produced a cumulative return of 3.43%, 24.03% and 43.63% over the last one, three and five years respectively and is Silver rated by independent research and ratings company Morningstar OBSR. With the outlook remaining optimistic for the high yield bond sector this fund could be a worthy inclusion in any income focused portfolio. The fund has a total ongoing annual management charge of 0.75% and is available at 0% initial charge via the Fair Investment Fund Supermarket.
* 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 30/04/2015.
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 capital value of the Kames High Yield Bond fund and its income 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. Please refer to the fund factsheet for specific fund risks.
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. Any return on your investment is not guaranteed and there is a risk of losing some or all of your initial investment due to the performance of the FTSE 100 Index or shares listed on the FTSE 100 Index. As shares prices can move by a wide margin plans based on the performance of shares represent a higher risk investment than those based on indices as a whole. There is also 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 and shares listed on the FTSE 100 Index is not a guide to their future performance.