These investments could help pay your energy bills

I am a miser when it comes to putting on the heating. My family has a long-standing tradition of telling each other to ‘layer up’ and leaving the oven open after cooking to make the most of the electricity spent.

But last winter, when my flat became known in my social circles as ‘the igloo’, I realised I may have gone too far. I kicked on my unit and sat with my back against it until the heat made its way through my coat and verged on burning my shoulders. I was in bliss. Then, my electricity bill arrived.

For practical reasons, it’s hard to avoid a higher electric and gas bill in the winter. We can install smart meters and spend a few extra days in the office to achieve savings at home, but inevitably, costs will creep up. This year, the average duel-fuel energy bill for a one-to-two-bedroom household costs around £1,266 each year, according to Uswitch. 

However, what can help to ease the pain of a higher bill is a little more income to help cover it. And while it does require the ability for an upfront investment, investing to generate a regular income could remove some of the pressure of a winter heating bill.

Can I generate income from energy companies? 

There would be a poetic justice to being paid by the very companies that have upped your energy bills over the past few years. This doesn’t necessarily make for a good investment strategy, but some energy companies have performed well in recent times.

British Gas is owned by FTSE 100 member Centrica, whose shares have delivered a 389% total return in the past five years, and has a forecast yield of 3.1%. While Octopus Energy is not listed, investors can buy shares in an investment trust it runs, Octopus Renewables Infrastructure Trust. The trust, however, has been a much rougher ride for investors, with the share price losing 30% of its value in the past five years. However, it does pay a 10.7% dividend.

There are lots of fund options

Luckily, there are many other avenues for investors to make income off their investments, and plenty of vehicles designed for it, including funds. If investors are looking to create income to access now from their holdings, they will need to choose the income (Inc) version of the fund, rather than the accumulation (Acc) version. Accumulation versions will automatically reinvest the money rather than paying it out. 

Here are 10 funds featured on AJ Bell’s Favourite funds list with the highest yields. Yield refers to the amount of income the fund has paid out to investors. For example, if you invested £1,000 and the fund had a 5% yield, you’d be paid out £50 before fees. 

It is important to note the published yield is not necessarily the exact amount you will receive. The yield is based on the past 12 months’ payout, not what is coming in the future. The published figure gives you a sense of what might be possible, but it could ultimately end up being higher or lower.

After all, funds can only pay out the income that the stocks or bonds they hold pay out to them.

Top 10 highest yielding income funds on AJ Bell’s Favourite funds list

Income from bond funds

Bond funds are one of the most common ways to receive an income from investing, because bonds have set coupons which mean they must pay out an agreed upon amount each year. However, this doesn’t mean you’ll always be guaranteed the same payout from a bond fund, because there can still be defaults on these payments, and the managers will be buying and selling different bonds.

The M&G Emerging Markets Bond fund invests primarily in government bonds from emerging countries, like Mexico, South Africa, and Uruguay. It’s able to offer a relatively high yield because it is investing in markets that are considered riskier than, say, a UK gilt. As an actively managed fund, it does come with a manager’s charge of 0.68%, which is likely more than you’d pay for a passive fund. However, it’s beaten its benchmark on a one-year, three-year, five-year and 10-year basis. 

Income from equity funds

Those looking to create larger gains from their investments may look towards equity, which can often offer a combination of growth and income. The AJ Bell Favourite funds list highlights Man Income Professional, which has achieved a three-year total return of 17.7% and has an historic yield of 4.7%. This is a UK equity income fund, with top holdings in companies including GSK, Rio Tinto and HSBC. It distributes income to its investors monthly and has an ongoing charge of 0.9%.

The UK is a popular place to look for investors that are seeking income, because many of the companies pay large dividends. The FTSE 100 has a dividend yield of 3.3% and has averaged a total return of 15% over the past five years. Investors in search of lower fees may opt for a passive fund following the FTSE 100 in the hope of enjoying this level of income and overall return.

Many of us won’t be able to make enough income from these investments to cover our entire energy bill for the year. To cover the average £1,266 cost, even if you invested in a fund with a hefty a 7% yield, you’d need £18,085 and to make sure you had enough to cover any fees on top. But what might be more reasonable is generating enough cash to cover at least some of your bill. A bit of income could mean a lot less time fretting about how much power it takes to heat a kettle.