Income needs are a top priority for both savers and investors, evidenced by the increasing number of our existing customers and those new to Fair Investment looking for income solutions. With this in mind, we have put together our Top 10 income ideas for 2014. From a fully capital protected bank deposit and a unique fixed income investment, to investment funds and fixed term investment plans offering high yield opportunities, there should be something here that appeals. We also give you our in-house view of each from Oliver Roylance-Smith, our Head of Savings and Investments and for those who are yet to use their ISA allowance, all are available within an ISA so you could benefit from tax free income.
1. Income best seller – 5.40% fixed income, monthly payments
The Enhanced Income Plan from Investec was our most popular income investment in 2013 and continues to be a best seller. The main appeal is that it offers a fixed income for a fixed term, regardless of the performance of the FTSE 100 Index, so you know exactly how much you will receive, when and for how long. The annual income is currently 5.40% (paid as 0.45% each month) which is high when compared to typical yields currently being paid by equity income funds. Capital is at risk if the FTSE drops by more than 50% during the plan and fails to recover by the end of the term, in which case your initial capital will be reduced by 1% for each 1% fall, so you could lose some or all of your initial investment. There are no annual management charges with this plan.
Fair Investment view: “5.40% tax free income (if held in an ISA) is the equivalent of 6.75% taxable income for a basic rate tax payer and 9.00% for a higher rate tax payer. This high level of fixed income and the monthly payment frequency are popular features and with ongoing uncertainty around future interest rates and dividend yields, this plan offers a competitive balance of risk versus reward that could be considered by both savers and investors”
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2. High yield opportunity – up to 9.04% income, quarterly payments
The FTSE 4 Quarterly Income Plan from Focus (Credit Suisse counterparty) offers the opportunity for up to 9.04% per year. Your income is dependent on the performance of four FTSE 100 companies and a quarterly payment of 2.26% is made provided the value of all four shares at the end of each quarter are at or above 60% of their value at the start of the investment. If one or more shares are below this level, no income payment will be made for that quarter. The return of your initial investment is also dependent on the performance of the same four shares. On the final day of your investment should the value of the lowest performing share be less than 50% of its value at the start of the plan, your initial capital will be reduced by 1% for each 1% fall and so you could lose some or all of your initial investment. There are no annual management charges with this plan.
Fair Investment view: “Investors rarely achieve an income anywhere near 9.04% and the ability for each share to fall up to 40% and investors still receive an income is a compelling feature. However, the fact that income and the return of capital are based on the performance of four shares rather than the Index as a whole should be a key consideration.”
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3. Experienced investor top pick – 7.25% provided the FTSE stays above 3,900 points
Our experienced investor section contains a number of investment opportunities for our existing investors and those who have experience of putting their capital at risk. The Enhanced Income Builder from Gilliat (counterparty) offers up to 7.2% each year with income accruing for each Friday during the term that the FTSE 100 closes above 3,900 points – if it closes below this level, no income will be added for that week. All accrued income is then paid out each quarter. Your capital is at risk if the value of the FTSE on the last day of the investment is below the same 3,900 point barrier, in which case your initial capital will be reduced by the equivalent drop in the Index, so you could lose some or all of your initial investment. There are no annual management charges with this plan.
Fair Investment view: “If you are looking for the potential for a high level of income and you are confident the FTSE 100 will remain above 3,900 points in the coming years, this plan is a worthy contender. Due to the gap between the recent levels of the FTSE and the floor of 3,900 points, this plan combines the potential for a high yield with some capital protection against a falling market”.
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4. 6% income provided the FTSE stays above 80%, quarterly payments
The FTSE Quarterly Income Plan from Start Point (BNP Paribas counterparty) offers up to 6% income each year with 1.5% paid each quarter provided the FTSE 100 Index is at or above 80% of its value at the start of the plan. If the FTSE is more than 20% lower, no income will be paid for that quarter. The plan also contains some capital protection against a falling market since unless the FTSE has fallen by more than 40%, your initial investment is returned in full. If it has, your initial capital will be reduced by the equivalent drop in the Index, so you could lose some or all of your initial investment. This is measured on the final day of the investment only rather than throughout the term. There are no annual management charges with this plan.
Fair Investment view: “With low savings rates and many UK equity income funds yielding less than 4%, the potential for up to 6% income is appealing depending on your view of what might happen to the FTSE. Combined with some capital protection against a falling stock market and this plan is certainly worth a closer look.”
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5. Invesco Perpetual Monthly Income Plus fund – 5.23% yield*, monthly income
The first fund in our Top 10 income ideas, the Monthly Income Plus fund has been popular with income investors for many years. Launched in 1999, the current management is split between Paul Causer, Paul Read and Ciaran Mallon who together have secured a Morningstar OBSR Gold rating. Now almost £4 billion in size, the aim of the fund is to achieve a high level of income together with capital growth over the long term by investing primarily in corporate and government high yielding debt securities globally as well as equities (up to maximum of 20%). Ongoing annual fund charges are 0.67% and is available now at 0% initial charge.
Fair Investment view: “Of the 444 current total holdings, around two thirds are with B to BBB credit rated institutions and just under 17.03% of the fund is in equities, so investors will experience some volatility. The fund has produced 5.55%, 23.59% and 101.95% over the last 1, 3 and 5 years respectively, outperforming its sector by some margin. It has a current distribution yield of 5.23% with income payments made at the end of each month, which is particularly popular with investors looking to supplement their income.”
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6. Corporate bond selection – Royal London Corporate Bond, 5.15% yield*
The Royal London Corporate Bond fund is Gold rated by Morningstar OBSR and has a current distribution yield of 5.15% with quarterly income payments. Its aim is to achieve a combination of mainly income with some capital growth over the medium to long term (5 to 7 years) by investing in a broad range of sterling fixed interest assets. The majority of the 216 holdings within the fund are with BBB and A rated credit institutions. Ongoing annual fund charges are 0.95% and is available now at 0% initial charge.
Fair Investment view: “The fund was launched in 1999 and is just over £0.5 billion in size. It is managed by Sajiv Vaid and has consistently outperformed its benchmark producing a cumulative return of 4.33%, 26.41% and 70.28% over the last one, three and five years respectively and was ranked in the top quartile over each of these timeframes. This fund may well appeal to investors looking for a core, income producing corporate bond holding within their portfolio.
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7. Capital protected best seller – potential 4.40% annual income
The Target Income Deposit Plan from Investec offers 4.40% each year provided the value of the FTSE 100 Index at the end of each year is higher than 90% of its value at the start of the plan (subject to averaging). If the Index finishes below 90%, no income will be paid although should it meet the required level on any future anniversary, any missed payments will be added back. Since the plan is structured as a deposit, your original capital is eligible for FSCS protection up to £85,000. There are no annual management charges with this plan.
Fair Investment view: “The maximum fixed rate Cash ISA over 5 or 6 years is currently offering around 3% AER and so this plan could be an attractive alternative for savers and more cautious investors prepared to sacrifice a guaranteed return in the hunt for higher potential returns, but for who capital protection is a top priority.”
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8. Neil Woodford’s new fund launch – 4% anticipated yield
Neil Woodford, one of Britain’s best known fund managers, is launching the first fund through his new venture, Woodford Investment Management. The CF Woodford Equity Income fund will have the same investment approach employed by Mr Woodford in his time at Invesco Perpetual and will have an anticipated yield of 4% and quarterly income payments. The fund opens on 2nd June for an initial offer period up until 19th June during which time it will be available at £1 per share. Ongoing annual fund charges are 0.75% and fund is available at 0% initial charge.
Fair Investment view: “Having been in charge of over £33 billion of assets including the best performing fund in the UK equity income sector under his management, news of Neil Woodford’s new venture has understandably caused great interest. A contrarian investor whose performance speaks for itself, being in at the beginning of his new fund launch could be a rare and exciting opportunity for long-term investors.”
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9. UK equity income selection – Artemis Income, 3.7% yield**
The aim of this fund is to produce a rising income with capital growth from a portfolio primarily made up of investments in the UK. The fund was launched in 2000 and is now over £6.6 billion in size, the majority of which are in large and mid cap stocks (82.4% and 12.3% respectively). It has a current historical yield of 3.7% and makes income payments twice a year. The fund has total ongoing charges of 0.73% and is available now at 0% initial charge.
Fair Investment view: “The fund has produced a cumulative return of 10.8%, 36.3% and 96.9% over the last 1, 3 and 5 years respectively and is Gold rated by Morningstar OBSR. The managers Adrian Frost and Adrian Gosden have significant experience managing equity income funds and a long history of outperforming. This fund could be seen as a core long-term income holding.”
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10. Managed income selection – Jupiter Merlin Income Portfolio, 3.1% yield**
The final income idea on our Top 10 is a managed fund. Launched in 1999, the fund’s objective is to achieve a high and rising income with some potential for capital growth by investing predominantly in unit trusts, OEICs, Exchange Traded Funds and other collective investment schemes across several fund management groups. The majority of the fund is in equities and fixed interest, 44.3% and 31.2% respectively. The fund has an annual management charge of 0.75% and is available now at 0% initial charge.
Fair Investment view: “The current historical yield is 3.1% and income is paid quarterly. The fund is managed by the highly experienced Jupiter Merlin team and has a Gold rating from Morningstar OBSR. This fund is a strong contender for those investors who want to leave the split between equities and fixed interest to the fund managers.”
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* the distribution yield reflects the amounts that may be expected to be distributed over the next twelve months as a percentage of the Fund’s net asset value per share as at the date shown. It is based on a snapshot of the portfolio on that day. It does not include any initial charge and investors may be subject to tax on distributions.
** the historical yield reflects distributions declared over the previous 12 months as a percentage of the mid-market unit price, as at the date shown. It does not include any preliminary charge and investors may be subject to tax on distributions.
All fund data correct as at 30/04/2014
No news, feature article or comment should be seen as a personal recommendation to invest. Prior to making any decision to invest, you should ensure that you are familiar with the risks associated with a particular investment. If you are at all unsure of the suitability of a particular investment, both in respect of its objectives and its risk profile, you should seek independent financial advice. Tax treatment of ISAs depends on your individual circumstances and may be subject to change in the future. ISA transfer charges may apply – please check with your ISA provider.
The value of investments and income from them can fall as well as rise and you may not get back the full amount invested. Different types of investment carry different levels of risk and may not be suitable for all investors. Past performance should not be taken as a guide to the future and there is no guarantee that these investments will make profits; losses may be made.
The Investec Target Income Plan is a structured deposit that is capital protected. There is a risk that the company backing the plan or any company associated with the plan may be unable to repay your initial investment and any returns stated. In this event you may be entitled to compensation from the Financial Services Compensation Scheme (FSCS), depending on your individual circumstances. In addition, you may not get back the full amount of your initial investment if the plan is not held for the full term. The past performance of the FTSE 100 Index or shares listed within the Index is not a guide to their future performance.
The investment plans detailed are structured investment plans which are not capital protected and are not covered by the Financial Services Compensation Scheme (FSCS) for default alone. There is a risk of losing some or all of your initial investment. There is a risk that the company backing the plan or any company associated with the plan may be unable to repay your initial investment and any returns stated. In addition, you may not get back the full amount of your initial investment if the plan is not held for the full term. The past performance of the FTSE 100 Index or any shares listed within the Index is not a guide to future returns.
