High-yielding fund ideas for income seekers in 2025

January is often the grimmest month for your personal finances. Tax bills loom, while festive spending has often generated chunky credit card bills. Introducing an income element to your ISA options in 2025 can help repair the damage, and this year, as interest rates are expected to fall, finding the right income option may become even more important.

Unlike the income desert that investors encountered in the wake of the global financial crisis, it is pretty easy to generate a decent level of income today. Most easy-access cash ISAs pay 4%-5%, a 10-year UK government bond has leaped to nearly 4.9% following last week’s bond market sell-off, while the dividend yield on the FTSE All-Share index sits at around 3.6%.

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However, ensuring that income beats inflation, and is sustainable, is a different challenge. At the same time, interest rates are scheduled to fall, which could dent the income from cash savings and from government bonds.

All yield figures and discount data to 13 January 2024.

UK equity income funds

Against this backdrop, equity income funds are a good place to start for income seekers. It is perfectly possible to get 5%-6% income from a well-run, well-diversified UK equity income fund. If all an investor needs is an income that keeps pace with inflation, from a diversified portfolio of equities, there’s an abundance of choice: Merchants Trust Ord (LSE:MRCH), CT UK High Income Ord (LSE:CHI), City of London Ord (LSE:CTY), or Murray Income Trust Ord (LSE:MUT), for example.

James Carthew, head of investment companies at QuotedData, says: “Janus Henderson’s stable of UK equity income trusts include Lowland Ord (LSE:LWI), where the yield is about 5.1%, in part thanks to its -7.6% discount. I have always liked the investment approach taken by managers James Henderson and Laura Foll.”

Fund managers suggest that UK dividends look as robust as they have for some time, with dividend cover for the FTSE 100 – the extent to which dividends are covered by a company’s profitability – around 20% higher than the level it was pre-pandemic.

It is possible to get an even higher yield on equity income funds, but it does mean looking at less obvious options. Carthew suggests abrdn Equity Income Trust Ord (LSE:AEI).

He says: “This has a yield of just over 7% currently, which is probably why it trades on a fairly narrow discount of -2.4%. The UK market is still undervalued relative to global peers and therefore continues to be an attractive source of income for investors.

“The trust’s long-term (five-year) returns don’t look great relative to the peer group - but its one-year figures are much better and I think this may reflect a return to more normal levels of inflation and interest rates which are likely to persist for a while yet.”

Thomas Moore, fund manager of abrdn Equity Income Trust, was recently interviewed by interactive investor, and you can watch the videos by clicking the links below.

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Broadening income horizons

Outside the UK, Tom Poulter, head of quantitative research at consultancy group Square Mile, suggests the Schroder US Equity Income Maximiser fund. The US is not a natural hunting ground for income investors, but this fund targets a yield of 5% through exposure primarily to larger US companies.

He says: “The team aims to achieve this by constructing a portfolio of around 200 to 220 stocks, which broadly replicate the S&P 500. They then apply an option overlay strategy to achieve the fund's 5% yield objective. 

“Because it aims to generate a specific yield, the actual income each year is dependent on the fund's price and so a drop in the US market will lead to a lower income. Although the fund's current yield is just shy of its target, we believe a positive price return for US equities and therefore an increase in the income paid out by the fund as a reasonable expectation over the longer term.”

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Looking beyond equity income, property has been out of favour, but is now seeing green shoots of recovery as valuations improve and interest rates fall. Jake Moeller, associate director, responsible investment at Square Mile, suggests investors dip a toe back in with TR Property Ord (LSE:TRY). This yields 5.4% and is one of interactive investor’s Super 60 investment ideas.  

Moeller adds: “The trust invests primarily in a portfolio of shares and securities of property firms and property-related businesses on a pan-European basis, although it does have a modest exposure (sub-15%) to physical property in the UK. Its experienced and knowledgeable manager aims to identify quality assets with the potential to benefit from macroeconomic tailwinds.”

Where to find yields above 6%

There are plenty of other options for investors looking for a yield of 6%-7% without straying into distressed areas or more esoteric parts of the market. Gavin Haynes, investment consultant at Fairview Investing, suggests the Aegon High Yield Bond fund, which is yielding 7.7%. 

He notes: “While the area has performed well - and would be hit by a sharp economic slowdown - the conditions remain supportive. Yields in the asset class remain attractive and default levels are currently low.

“The Aegon fund has built up a strong track record of generating strong risk-adjusted returns and paying an attractive income distributed monthly. The managers are high-conviction stock pickers and are supported by a well-resourced team of credit analysts. The fund is currently focused on the high-quality end of the spectrum, which seems prudent, but still provides an attractive yield over 7%.”

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Carthew suggests looking at some of the infrastructure investment trusts. These used to be popular with investors as a stable, income-generative ballast in a portfolio, but have been hit hard by sliding rates and could be ripe for a recovery if interest rates continue to fall. He likes BBGI Global Infrastructure Ord (LSE:BBGI), which trades on a -19.4% discount and has a yield of 7.2%. “Its cash flows are contractual and predictable. They are also, in part, inflation-linked. Unlike most other infrastructure trusts, the revenues are related to ensuring that the assets that it has financed are available for use, like a school building, rather than variable, like a toll road,” says Carthew.

Another option is GCP Infrastructure Investment Ord (LSE:GCP), which Carthew says is still trading “on far too wide a discount and far too high a dividend yield” – with the discount -34.8% and the yield at 10.2%. He adds: “It is making progress with its capital recycling programme, buying back shares and paying down debt, and says it has some exciting opportunities for new investments.”

Haynes also likes the VT RM Alternative Income fund as a potential diversifier away from traditional equity and bond income. This invests in a portfolio of specialist high-yielding investment companies with a focus on three key themes: infrastructure, real estate and specialist credit.

He adds: “There are some interesting opportunities in this space with areas such as renewable energy trusts on large discounts, but you need specialist knowledge - which fund manager Pietro Nicholls certainly has. It feels a better option to invest in a fund with an actively managed diversified portfolio as opposed to picking a couple of trusts yourself. They have a good record of generating attractive income-focused returns and the yield is currently 7.1%.”

Take your pick from renewable energy trust sector

For those brave enough to explore higher-yielding options, Carthew points out that investors could pick almost any trust in the renewable energy sector and receive a very high, growing dividend. It is also an area James Calder, chief investment officer at City Asset Management, is looking at, pointing out that the revenue streams from this sector are government-backed and long term.

He adds: “They have gone out of favour and the share prices have dropped, but they are still generating the same strong cash flows. That means the level of yield has got higher and higher.”

The yields on some trusts are astonishing – NextEnergy Solar Ord (LSE:NESF) at 13.8%, Foresight Environmental Infrastructure (LSE:FGEN) at 11.3%, Sequoia Economic Infrastructure Inc Ord (LSE:SEQI) at 8.8%.

As Calder points out, investors only need to be invested for six to eight years to get their money back in dividends alone.

While fund yields move up and down, the rule of 72 is a mathematical formula that estimates the number of years it takes to double your money at a certain yield level. You simply divide the yield by 18 to get the answer.

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Renewable energy infrastructure trusts remain on large discounts, which could give them an additional bounce if the share price recovers. There have also been tentative signs of a share price recovery and Calder believes this may build as interest rates fall. Carthew also highlights Greencoat UK Wind (LSE:UKW), trading on a -22.9% discount and 8.2% yield, as well as Bluefield Solar Income Fund (LSE:BSIF), which is on a -32.3% discount and 10.4% yield.

There are a range of income options for both cautious and brave investors. Most will provide a higher income than a savings account, and with more inflation protection, but for those willing to take a risk, yields of 10% or higher are available. That should help with next year’s January gloom.