Neil Shillito (pictured), director of SG Wealth Management, says that income-paying funds that focus on increasing their dividends give investors a safety blanket when they invest. Not only do established dividend-paying companies tend to hold up during tough times, but the income they pay helps to keep fund performance buoyant as markets fall.
Indeed, a number of funds with a long enough track record have actually paid back more to investors in dividends than their initial investment.
Shillito thinks that for anyone not relying on income on a week-to-week or month-to-month basis, reinvesting dividends is hugely beneficial.
Nevertheless, he says the fact that funds with a long-term track record have managed to pay back investors’ initial down payments with dividends makes them a very attractive proposition and a big tick in the box for income-paying vehicles.
Here is a selection of funds that have managed this feat.
Equities
Naturally it’s the funds that have been around the longest that dominate the list of those that have managed to pay investors back in dividends. One notable example is the £11bn Invesco Perpetual High Income fund, which was launched in 1988.
An investor who put £10,000 in the fund 17 years ago would have received just over £12,000 in dividends today. As the graph below shows, the absolute level of income has steadily increased over the period – in part because of the impact of compounding returns, but also because the fund has successfully targeted companies that raise their dividends.
Income paid out from £10,000 initial investment in June 1997
Source: FE Analytics
For the vast majority of this time the fund was headed up by FE Alpha Manager Neil Woodford, with Mark Barnett taking over in March of this year.
Shillito adds that dividend growth is also a sign that the capital return of a fund is likely to be strong.
“A company is unlikely to be paid up for if the dividend isn’t sustainable,” he said. “It’s a general sign that the company is healthy.”
Stripping out the impact of dividends, Invesco Perpetual High Income has delivered capital growth of 223.94 per cent over 17 years, compared with 67.88 per cent from the FTSE All Share and 131.51 per cent from the UK Equity Income sector average. Unsurprisingly, the fund is also a top-performer from a total return point of view.
If you had entrusted your £10,000 to Woodford when the fund was first launched in February 1988, you would have received £42,420 in the way of dividends – such is the power of compounding income.
The Newton Higher Income fund has taken an even shorter amount of time to pay back investors in dividends. Our data shows that a £10,000 investment just over 16 years ago would have delivered more than the initial investment by now.
The fund targeted a yield in excess of 120 per cent of the FTSE All Share in days past, but had to cut its dividend in the aftermath of the 2008 financial crisis and then the BP Macondo disaster in 2010. It has since revised down its yield target, and the absolute payment has actually decreased in recent years.
Other funds that have managed to pay investors back in dividends within the past 17 years include Rathbone Income, Schroder Income, Jupiter Income and Premier Income.
Income paid out from £10,000 initial investment in June 1997
Source: FE Analytics
Global equity income and emerging market income are relatively new concepts and very few funds have a track record going back far enough to come close to paying back investors in dividends.
One notable exception is the Liontrust Global Income portfolio, which has paid back more than £13,000 in dividends from an initial investment of £10,000 17 years ago. That is even more than Invesco Perpetual High Income.
Income paid out from £10,000 initial investment in June 1997
Source: FE Analytics
It is worth mentioning that the fund only moved into the Global Equity Income sector recently, having spent the vast majority of its life in IMA UK Equity Income. It still has around 60 per cent of its assets in the UK.
Bonds
The potential for capital appreciation in bond funds is less than in the case of equities, meaning that income generation is even more important to overall performance.
These funds are more popular with investors who cash in on their dividends every month or quarter-end as well, so looking at those that have made up their initial investment with income is particularly worthwhile.
Again, 17 years seems to be the threshold for funds in the IMA Corporate Bond and Strategic Bond sectors. The likes of Invesco Perpetual Corporate Bond, headed up by Paul Causer and Paul Read, Fidelity Moneybuilder Income, which pays out a dividend monthly, and M&G Corporate Bond have managed to pay back an initial £10,000 investment in early 1997 in dividends.
Income paid out from £10,000 initial investment in Jan 1997
Source: FE Analytics
There are some bond funds with a particularly strong focus on paying dividends that have managed the feat much quicker, however. Such funds are often seen as ideal for anyone relying on income in retirement.
Artemis High Income is a good example. It has paid back £11,260 in dividends over a 14-year period.
Income paid out from £10,000 initial investment in June 2000
Source: FE Analytics
The fund, managed by FE Alpha Manager Adrian Frost, Adrian Gosden and Alex Ralph, is currently yielding 5.3 per cent – significantly more than its IMA Strategic Bond sector average.
The managers do tend to have a high equity content, currently at around 17 per cent. This has helped to prop up the income, but it has contributed to the fund’s higher annualised volatility and max drawdown in recent years.
While officially a bond fund, some experts would say Artemis High Income is more of a multi-asset fund, as it has a significant portion of its assets in another area. Other multi-asset funds with an income focus that have managed to pay back investors in dividends over the past 17 years or so include Ecclesiastical Higher Income and John Chatfeild-Roberts’ Jupiter Merlin Income Portfolio.
