To maximise returns, investors should reinvest their yield back into the fund
The 10 best actively managed dividend income-paying funds
Whether buying individual stocks or collective mutual funds, you should never underestimate the power of the dividend.
Dividends are the regular payments companies make to reward investors and maintain their loyalty, and over the long run they can make up a surprisingly high proportion of your overall investment return.
Gordon Robertson, director of Investme financial services in Dubai, says many investors ignore their potential. “The S&P 500 had a total return over the last 20 years of approximately 176 per cent, or 5.25 per cent a year. If you had reinvested all your dividends, your total return would have risen to 297 per cent or 7.2 per cent a year.”
A healthy dividend is also a sign of a healthy company, one that has solid and regular cash flows and a balance sheet that allows it to fund a regular stream of quarterly or annual payments to investors.
You can tap into this category of company by investing in a mutual fund, which will pass on the dividends to you on top of any share price growth.
The amount of income you receive is shown as the “yield", which is calculated by dividing the dividend by the company's share price. So if the dividend is, say, $1 per share, and the share price is $20, the yield is a healthy 5 per cent.
If you invest $20,000, you receive income of $1,000 a year. The trick then is to reinvest this income back into your stock or fund so that it buys extra units, which will then generate more income in a virtuous circle.
Just remember that yields are not guaranteed, and companies can even axe their dividend altogether if they run into trouble. However, you can limit the risk by investing in an actively managed mutual fund, which will invest in a spread of companies across different markets, sectors and countries.
Investment fund charges will eat into your dividend income, so always check the ongoing charges figure (OCF). Charges on actively managed funds have fallen under pressure from low-cost passive rivals exchange traded funds (ETFs) and many have charges totalling less than 1 per cent a year, as measured by the OCF. We have consulted industry experts, who have recommended the following 10 funds to help you tap into dividend power:
Fidelity Global Dividend Fund
Yield: 2.74 per cent
Tom Anderson, senior investment manager at financial advisers Killik & Co, who has clients in Dubai, favours this $1.14 billion fund by asset management house Fidelity International, which invests in a global spread of shares with the aim of producing long-term capital growth.
Around 28 per cent is invested in the US, 19 per cent in the UK, then a spread of international markets including the Netherlands, China, Japan, Switzerland, France and Germany.
Top holdings include Dutch-based information services giant Wolters-Kluwer, oil major Royal Dutch Shell, US Bancorp Delaware, London-based analytics company Relx, Taiwan Semiconductor Manufacturing, Procter & Gamble, Johnson & Johnson and French-based pharmaceutical company Sanofi.
The current yield is relatively low at 2.74 per cent but it compensates with strong capital growth, delivering a total return of 66.3 per cent over five years, according to Trustnet.com.
Mr Anderson says: "While actively managed funds do have higher charges than passive exchange traded funds (ETFs), Fidelity Global Dividend's ongoing charges figure is a modest 0.97 per cent. This has been justified by its superior return.”
Schroder Income Fund
Yield: 3.34 per cent
UK companies pay some of the most generous dividends in the world and Mr Anderson recommends Schroder Income Fund as a good way to tap into this generosity.
The $3bn fund, which also has exposure to the US and Australia, typically holds 30 to 50 stocks with strong cash flows, solid earnings and regular dividend hikes, that appear to have been undervalued by the market.
Top shareholdings include oil giant BP, global bank HSBC, pharmaceutical company GlaxoSmithKline, British Gas owner Centrica, mining stock Anglo American, and insurer Aviva.
The fund has returned 58 per cent over the last five years, and currently yields a steady 3.34 per cent.
Mr Anderson says: “Generous dividends make the UK a popular destination for investors seeking income.”
BlackRock North American Income Trust
Yield: 3.86 per cent
The US stock market has been the place to be in recent years, and this has driven performance at the BlackRock North American Income Trust.
This fund is an investment trust, a mutual fund that is traded on the stock like a company share, and is a relative minnow with just $157 million under management.
Do not let this put you off, it has delivered a total return of 69 per cent over the last five years, and currently yields a healthy 3.86 per cent.
Almost 80 per cent of the fund is invested in US equities, with some exposure to the UK and Europe as well.
Top holdings including JP Morgan Chase, Bank of America, Pfizer, Citigroup, Wells Fargo, Oracle and Microsoft.
Charges are slightly higher at 1.07 per cent a year but Mr Anderson says: “The US equity market makes up over 50 per cent of global indices so it should be part of a diversified portfolio.”
JP Morgan Global Growth and Income Trust
Yield: 3.78 per cent
Finally, Mr Anderson recommends a global income fund that takes an unusual approach.
This $550bn investment trust invests in a portfolio of between 50 and 90 “growth” stocks that may not even pay a dividend at all, then funds its dividend out of this capital growth, with the aim of maintaining a yield of around 4 per cent a year.
Currently, it yields 3.78 per cent and has delivered a total return of a whopping 99 per cent over five years. Charges are low as well, the OCF is just 0.57 per cent, almost as low as many ETFs.
Top holdings include Google owner Alphabet, Microsoft, insurer Prudential, Union Pacific Railroad, Citigroup and Visa.
Fidelity Enhanced Income W (Inc)
Yield: 6.29 per cent
Russ Mould, investment director at wealth advisers AJ Bell, recommends Fidelity Enhanced Income, which yields a hugely generous 6.29 per cent, but with a twist. “The $484m fund invests in a range of higher-yielding British blue-chips such as global bank HSBC, BP and Royal Dutch Shell, British American Tobacco and pharmaceutical company GlaxoSmithKline.”
The twist is that it also writes call options on a portion of its holdings. "This helps it to generate higher income, although this means sacrificing some capital growth. As such, it suits investors seeking the highest possible income,” says Mr Mould.
Total return over five years is 25 per cent, with an OCF of 0.95 per cent.
JP Morgan Multi-Asset Income C (Inc)
Yield: 3.69 per cent
As well as using dividend stocks to generate income, you can also invest in government bonds and corporate bonds.
JP Morgan Multi-Asset Income gives you a combination of the two, investing in a range of income-generating securities, including stocks and shares, but also fixed and variable interest rate bonds, high-yield bonds, convertible bonds and even some sub-investment grade bonds, know as “junk” bonds.
Mr Mould says: “Around 60 per cent of the portfolio is currently allocated to corporate bonds and income-seekers may be intrigued by the fact that dividends are paid monthly.”
Bonds typically generate lower capital growth than stocks and shares so the total return is only 25 per cent over five years, but with lower risk than a pure equity fund. The yield is 3.69 per cent and the OCF is 0.80 per cent.
Jupiter Asian Income
Yield: 4 per cent
The Western world is not the only place to find income generating stocks, Asia is rapidly quickly catching up. “Many investors still overlook Asia but it boasts a growing pool of companies with good yields and a fine track record of paying dividends,” Mr Mould says.
The $765m fund has delivered a total return of 60 per cent over the past five years, and currently yields 4 per cent. Ongoing charges total 0.98 per cent.
Mr Mould adds: “Jupiter Asian Income targets high-quality companies that are capable of consistently increasing their dividends over time.”
Unicorn UK Income B (Inc)
Yield: 3.9 per cent
Mr Mould says the best dividend stocks look to consistently increase their income payouts year after year, and this fund tracks them down.
Unusually, it targets small and medium-sized companies rather than blue chips, and has delivered a total return of 55 per cent over the past five years and a current yield of 3.9 per cent. Ongoing charges total 0.80 per cent.
Invesco Perpetual Global Equity Income
Yield: 3 per cent
Tom Stevenson, investment director at global asset manager Fidelity International, recommends Invesco Perpetual Global Equity Income, which invests in a balanced spread of global equities with 30 per cent exposure to the US, 22 per cent in the UK, then other companies including France, Switzerland, Germany, Holland, Japan and Canada.
Top holdings include oil giants Chevron, Total, Royal Dutch Shell and BP, and JPMorgan Chase, Orange, Pfizer and Nasdaq.
The $1.2bn fund yields 3 per cent and ongoing charges costs 0.92 per cent. Mr Stevenson says: “It offers a diversified source of income that’s hard to find in today’s low-interest-rate world."
Jupiter Strategic Bond
Yield: 3.5 per cent
This $5bn behemoth invests in a spread of Government fixed-interest bonds and corporate bonds.
Just over half the fund is invested in global corporate bonds issued by individual companies, with 38 per cent in government bonds, particularly US Treasuries.
Mr Stevenson tips this for investors looking for a steady income with a degree of capital protection. “This flexible fixed income fund could help smooth over what could be a bumpier ride for stock markets this year.”
It currently yields 3.5 per cent, and has delivered a total return of income and capital growth of 22 per cent over five years. The OCF is 0.73 per cent.