A big reason lots of people invest in the stock market is to get income and funds are a popular option because they offer the added benefit of diversification.
Unlike when you invest in an individual company, which can pause or cancel its dividend at a management team’s discretion, the risk of your income stream being meaningfully disrupted is much less if you are investing in a larger collection of dividend-paying stocks through a fund.
The most popular income funds with AJ Bell DIY investors are listed in the table below, along with their performance and their historic yield. There is no guarantee they will pay this level of yield in the future but it offers at least a guide to what you can expect.
We’ve only included products which have generating income in their mandate and the list does not include bond or infrastructure funds which some people might buy for their income appeal.
Some funds look for growth and income
We have included funds and investment trusts which are targeting growth alongside income and JPMorgan Global Growth & Income is a popular example on the platform, as is AJ Bell Income & Growth.
JPMorgan Global Growth & Income funds its dividend from a combination of money held within the trust (which comes from selling holdings) and the income generated by its underlying portfolio.
This gives it the flexibility to invest in stocks with greater potential for capital appreciation that may not be accessible to conventional equity income strategies, as these companies tend to offer low or no dividend yield.
The trust offers investors a portfolio of 50 to 90 stocks, which it expects to exhibit superior earnings quality and faster earnings growth.
How do trusts sustain dividend growth for decades?
It is one of three investment trusts in the top 10. Trusts are able to hold back up to 15% of the income they receive from their investments in their revenue reserves.
They can use these reserves to boost dividends during lean spells when the underlying businesses may be cutting theirs. It has allowed some trusts to chalk years and even decades of dividend growth. City of London sits at the very top of the tree in this regard having increased its dividend for nearly 60 years.
Managed by Job Curtis since 1991, it holds a collection of large cap UK companies including HSBC, Shell, NatWest and AstraZeneca.
Law Debenture is another in-demand income-focused trust with a twist given it benefits from a unique combination of a traditional investment trust holding income stocks alongside a cash-generative professional services operating business.
A feature of traditional funds is they will often offer an ‘Acc’ or ‘Inc’ version. The former reinvests income from holdings for you while the latter pays out the income on a regular basis. Read more about the differences between Acc and Inc funds.
Going global for income
Going global for income is a favoured approach with AJ Bell customers; with both Guinness Global Equity Income and Artemis Global Income sought after. UK stocks often pay more generous dividends than their international counterparts and that is reflected in the lower yields on offer from these funds.
JPMorgan Emerging Markets Income also looks to far flung markets for income. Although yields will often be higher and potentially have more scope for growth, the emerging markets focus means there are greater risks in areas like currency, corporate governance, operating performance and geopolitics.
Tom Sieber: Content Editor
Tom Sieber is AJ Bell's Content Editor. He was previously the Editor of Shares Magazine. He has been with the business since 2012.
Tom is a regular contributor to the AJ Bell Money & Markets...
