However, after special dividends, the underlying dividend picture was much better, with companies growing their payouts by 6.1 per cent. Special dividends are a welcome boost to the total return on investments.
However, investors need to be aware that these are usually one-off payments and are unlikely to be repeated.
Constructing a portfolio to generate an income is straightforward, but it is important to know what your objectives are. Here are some tips to follow.
Identify how much income you need
If your income requirements are too high, then you may well end up with a portfolio that pays a high income but cannot sustain its capital value in real terms.
An income in excess of 5 per cent is probably unsustainable in the long-run.
Protect your capital
Many income-seeking investors aim to maximise income without protecting their capital.
High-yielding shares may be a sign that there is something wrong with the business or that the dividend might be cut.
Good equity income investors look to protect their capital and find those companies that pay a sustainable and growing dividend. This approach is likely to be supportive of the share price.
Diversify your income stream
If you are dependent on the income earned from your investments then it is essential to ensure you have a mixture of investments from which the income is derived.
Being a forced seller of an investment because the dividend has been cut is likely to be harmful to your wealth.
Diversification will minimise the impact of individual company events. In addition, investing in a number of asset classes will help to provide a stable income.
Income generated from corporate bonds is generally less volatile than that from equities.
Likewise, investing in overseas equity income provides access to markets with growing dividend yields.
The concept of equity income investing is simple – invest in the shares of well-managed companies whose dividends grow over time. This provides a rising income, which if reinvested can create a snowball effect of compounding growth.
Furthermore, the shares of such companies often find favour with investors, meaning their prices rise. Equity income should form the core of all investors’ portfolios, whether you are looking for income or growth.
Here are some funds we currently rate.
Artemis Income
Adrian Frost and Adrian Gosden have more than 50 years' investment experience between them.
Their strategy is to maximise long-term returns by targeting firms that are investing for the future and can keep growing their dividends.
Performance of fund vs sector and index over 10yrs
Source: FE Analytics
They would rather have 5 per cent dividend growth in a company investing to sustain long-term growth than 10 per cent at the cost of poorer long-term prospects.
Artemis Income currently has a yield of 4 per cent.
JOHCM UK Equity Income
This fund would complement the larger UK equity income funds. It has significant exposure, around 40 per cent, to higher-risk small- and medium-sized companies.
The managers, Clive Beagles and James Lowen, say the UK economy is performing better than most commentators think.
The fund continues to have a bias towards more economically sensitive companies and has performed well recently as a result.
Performance of fund vs sector and index since launch
Source: FE Analytics
It currently has a yield of 4.12 per cent and has delivered excellent capital growth.
Jupiter Strategic Bond
Manager Ariel Bezalel is currently finding the most opportunities in higher-risk, high-yielding corporate bonds, where 60 per cent of the portfolio is invested.
These bonds have a greater chance of default and offer a higher yield to compensate investors for the extra risk.
He aims to offset some of this risk through investing in more defensive sectors such as the food industry, where he believes the risk of default is lower than yields imply.
Jupiter Strategic Bond is currently yielding 5.5 per cent.
Newton Global Higher Income
Manager James Harries uses Newton's trademark approach to identify themes set to shape the investment landscape, such as emerging market growth, energy supply and the provision of healthcare. He then identifies companies well placed to benefit from these trends.
As well as seeking dividend stalwarts across the US, UK and Europe, he is currently finding opportunities among up-and-coming businesses in higher-risk emerging markets, where there is potential for strong dividend growth over the long-term.
He also invests in higher-risk smaller companies.
The fund currently yields 3.98 per cent.
Adrian Lowcock is senior investment manager at Hargreaves Lansdown. The views expressed here are his own.