Our favourite funds that pay you a monthly income
7th July 2022 13:03
by Sam Benstead from interactive investor
Bag a steady income stream with this bond, stock and ‘alternatives’ strategies.
With inflation soaring but savings accounts offering measly returns, it has rarely been more important to use an investment portfolio to top up a salary or pension income.
But most bond and stock funds only pay out income a couple of times a year, and companies pay dividends no more than quarterly. This makes it tough and time-consuming to organise a portfolio to organically deliver monthly payments.
Thankfully, some funds are structured to return cash on a monthly basis to investors, with four making it into interactive investor’s Super 60 list of recommended funds.
- Read about our: Sustainable Funds List | Top Investment Funds | Transferring an Investment Account
The highest yielding, at a 4.3% annual income, is Man GLG Income Professional. The £1.7 billion fund buys UK stocks that have above average dividend yields.
It owns a basket of around 75 British stocks, from oil majors Shell and BP to tobacco giants Imperial Brands and British American Tobacco. Dating back to 1999, it has returned 260% compared with 210% for the FTSE All Share. It pays out an income at the start of the month.
Fidelity Multi-Asset Income invests directly in stocks, but also owns third-party funds and alternatives, such as renewable energy and commodities. The £1.1 billion strategy pays its income in the middle of the month and currently yields 4.05%.
Since launch in 2007 it has returned 71%, including dividends, compared with 46% for its peers.
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Super 60 member Balanced Commercial Property yields around 4%. It invests in a range of property assets, from industrial buildings such as warehouses, to offices and shopping centres. The rent it generates is return to investors on a monthly basis, paid out at the end of each month.
Currently on a 22% discount to net asset value, investors could also get a big share price uplift if sentiment turns towards the property sector, which is currently out of favour due to rising interest and therefore mortgage rates.
Artemis Monthly Distribution, a mixed stocks and bonds fund, yields 3.6% and pays investors at the end of every month.
Its largest investments include Rai Way, an Italian telecoms company, and American energy firm PPL Corporation. Its bond portfolio includes debt from Ford Motors and the US government.
Other high-yielding, but not Super 60, monthly income funds include: TwentyFour Select Monthly Income (yielding 8%), abrdn Emerging Markets Bond (7%), and UBS Global Enhanced Equity Income Sustainable (8%).
Tracy Zhao, senior fund analyst at interactive investors, says there are many advantages to monthly income funds.
“They are lower risk investment options compared strategies whose performance heavily relies on capital appreciation, such as technology funds. In the environment of rising interest rate, investments that pay dividend frequently trend to have less portfolio volatility.
“During bear market, investments that could generate monthly income are deemed to be more appealing to investors,” she said.
But there are disadvantages, Zhao notes: "Income generation may be at the cost of capital appreciation, leading to lower total return, especially in a bull market."
She adds that investors may face re-investment risk, where funds are unable to reinvest cash flows received from investments at a rate comparable to their current rate of return.
“Inflation decreases the purchasing power of income investing which tends not to keep up with inflation nearly as well as lower-yielding growth stock over long term," said Zhao.
How monthly income funds work
Monthly income funds hold back cash they receive from bonds and stock dividends and then pay the money out steadily to investors.
This is typically in 11 equal monthly payments as “smooth” income followed by a final payment of everything that is left over. Payments can also be “lumpy”, where each monthly amount depends on how much income is generated over the preceding month.
Investors need to select the “income (inc)” share class to receive the cash each month into their account. A fund's factsheet will contain the income payment dates and the past dividends per share.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
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