Three income ideas for your portfolio
Posted by Adrian Lowcock in Latest insights category on 06 Mar 20
It is not easy to get a regular income from your cash savings these days. After more than a decade, interest rates are still languishing at very low levels and we think they are unlikely to rise much in the short term.
One option is to turn to the stock market to find a higher income, although this is riskier. Many successful companies have strong earnings and regularly pay dividends to their shareholders. We believe investing in shares could be a great place for those who can accept the extra risks and have a long-term outlook.
In addition, if you hold these investments in an ISA or SIPP then you don't have to pay any income tax. Although please note tax rules can change and the benefits will depend on your personal circumstances.
Here are a few of our favourite income funds that could be considered as part of a wider portfolio.
Threadneedle UK Equity Income
Richard Colwell is an experienced equity income manager and has been responsible for this fund
since 2010. His focus is on stock selection, and he holds a blend of quality companies and out-of-favour businesses with recovery potential. The high quality investments have strong cash generation, which can fund both dividends and long-term growth. The recovery selections may not currently pay a dividend but he believes they have the potential to provide income and grow the value of the business in the future. The fund is unconstrained but is mainly invested in large blue chip companies, although Colwell will take significant sector bets against the index to match his thematic views.
The largest position in the fund is the pharmaceuticals giant Astrazeneca. Colwell believes the company is well positioned to grow its dividend because of its pipeline of new, higher margin, products. The manager is also positive on the Industrials and Consumer Services sectors, which together account for nearly half of the fund’s total investments. Electrocomponents and Rentokil Initial, for example, both feature in the fund’s top five holdings.
Fidelity Global Dividend
This is a core global income fund, which invests in companies offering a healthy and sustainable yield. Dan Roberts has managed this fund
since its launch in 2012, with support from Fidelity's extensive research teams. Roberts considers himself a value investor and focuses on companies that can offer a good degree of capital protection during market downturns. This means the fund may lag in strong bull markets. Careful analysis of companies allows Roberts to identify those with stable finances and strong cashflow.
The portfolio currently favours pharmaceuticals and his largest company position is the Swiss giant Roche. The fund’s largest country exposure is the US, with holdings including US Bancorp, followed closely by the UK where the fund has exposure to both Relx and Unilever.
Man GLG UK Income
offers a highly disciplined approach to investing in UK equity income. Manager Henry Dixon's proven value style underpins his philosophy that pricing inefficiencies can be profitably exploited. He looks for companies trading below his team’s estimate of asset value, or those where the company’s profit stream is under-valued relative to the cost of capital. This comes with the additional requirement of a dividend yield at least equal to that of the UK stock market. The team also looks for strong free cash-flow and net cash positions that may produce positive dividend surprises. As well as the primary focus on valuation, the manager also seeks elements of quality and positive earnings momentum. The portfolio includes significant exposure to mid and small cap shares.
The manager currently has a significant position in the Tobacco sector, holding both British American Tobacco and Imperial Brands. The portfolio is also invested in oil stocks with exposure to the two large UK oil companies, Shell and BP, in the top 10 holdings.