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 2015, including fixed income investments, investment funds and other high yield opportunities. 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 – 5.16% fixed income, monthly payments
The Enhanced Income Plan from Investec was our most popular income investment in 2014 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 5.16% (paid as 0.43% 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.
Fair Investment view: “5.16% tax free income (if held in an ISA) is the equivalent of 6.45% taxable income for a basic rate tax payer and 8.60% for a higher rate tax payer. This high level of fixed income and the monthly payment frequency are popular features and with limited options for anyone looking for a fixed income over 5%, 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 6% income, quarterly payments
The FTSE Contingent Income Plan from Focus (Credit Suisse acting as counterparty) offers the opportunity for up to 6% per year. Your income is dependent on the performance of the FTSE 100 Index and a quarterly payment of 1.50% is made provided the Index at the end of each quarter is at or above 75% of its level at the start of the plan. If the Index is below this level, no income payment will be made for that quarter. Additionally, the plan offers the opportunity to mature early from year 3 onwards returning your original capital plus a final income payment. If the plan runs for the full term you will receive your initial investment back unless the FTSE has fallen by more than 40%, measured at the end of the fixed term only. If it has fallen below this level, capital will be reduced by 1% for each 1% fall and so you could lose some or all of your initial investment.
Fair Investment view: “The ability for the FTSE to fall 25% and investors to still receive 6% income could be an attractive investment proposition in the current climate, especially for those who are looking for income but are not convinced the FTSE can continue to rise. Combined with some capital protection against a falling stock market and this plan is certainly worth a closer look.”
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3. High fixed income – 7.50% fixed income, monthly payments
The FTSE 5 Monthly Income Plan from Meteor (Commerzbank acting as counterparty) offers a fixed income that is paid to you regardless of the performance of the stock market, the current version offering 7.50% annual income, paid as 0.625% each month. This high level of income is in exchange for a higher level of risk as the return of your initial capital is dependent on the performance of five FTSE 100 shares rather the Index as a whole. Should the value of the lowest performing share at the end of the five year term 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, so you could lose some or all of your initial investment.
Fair Investment view: “The fixed income on offer equates to a total return of 37.5% over the term of the investment and has been particularly popular with our ISA investors since if held within an ISA, there is no tax to pay on the income. The plan might also appeal to investors looking for a high level of fixed and regular income however, the fact that the return of your initial capital is based on the performance of five shares rather than the Index as a whole does make this a higher risk investment.”
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4. Potential 5.95% annual income, annual payments
The Dual Index Contingent Income Plan from Investec offers an annual income of 5.95% provided that both the FTSE 100 Index and the EURO STOXX 50 Index at the end of each year are at or above 65% of their respective levels at the start of the plan. The plan also contains some capital protection since your initial investment is returned in full unless one or both of the Indices have fallen by more than 50% during the term of the plan. If this 50% barrier is breached by either Index your initial capital will be reduced by 1% for every 1% fall of the worst performing Index, therefore you could lose some or all of your initial investment.
Fair Investment view: “With low savings rates and many UK equity income funds yielding less than 4%, the potential for up to 5.95% income is appealing depending on your view of what might happen in both the UK and Europe. Combined with some capital protection against a falling stock market and this plan could provide a compelling addition to any income investment portfolio.”
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5. Corporate bond selection – Royal London Corporate Bond, 4.45% yield*
The Royal London Corporate Bond fund is Gold rated by Morningstar OBSR and has a current distribution yield of 4.45% 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 284 holdings within the fund are with BBB and A rated credit institutions.
Fair Investment view: “The fund was launched in 1999 and is now around £780 million in size. It is managed by Sajiv Vaid and has consistently outperformed its benchmark producing a cumulative return of 9.30%, 29.50% and 46.63% over the last one, three and five years respectively and was ranked in the top quartile over 3 and 5 year timeframes. This fund may therefore appeal to investors looking for a core, income producing corporate bond holding within their portfolio.”
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6. High Yield Bond selection – Kames High Yield Bond, 4.99% yield*
Launched in 2002 and now over £1.5 billion in size, the Kames High Yield Bond offers the opportunity to receive a monthly income with a current distribution yield* of 4.99%. The primary investment objective of the fund is to maximise total return (income plus capital) by investing in a portfolio of predominantly high yield bonds, selected investment grade bonds and cash. Managed by Philip Milburn and Claire McGuckin, the main sector focuses are communications, consumer and energy with the majority of the 135 holdings within the fund with B rated credit institutions or above.
Fair Investment view: “The fund has produced a cumulative return of 3.43%, 24.03% and 43.63% over the last one, three and five years respectively and is Silver rated by independent research and ratings company Morningstar OBSR. With the outlook remaining optimistic for the high yield bond sector this fund could be a worthy inclusion in any income focused portfolio.”
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7. Strategic Bond selection – Invesco Perpetual Monthly Income Plus, 4.46% yield*
The Monthly Income Plus Fund from Invesco Perpetual has been a popular fund with income investors for many years and is now over £4 billion in size. Launched in 1999, the current management is split between Paul Causer, Paul Read and Ciaran Mallon who together have secured a Morningstar OBSR Silver rating. The aim of the fund is to achieve a high level of income together with capital growth over the medium to long term by investing primarily in corporate and government high yielding debt securities globally, as well as equities.
Fair Investment view: “Of the 429 current total holdings, around sixty percent are with B to BBB credit rated institutions and just under 15% of the fund is in equities, so investors will experience some volatility. The fund has produced 5.36%, 31.45% and 40.95% over the last 1, 3 and 5 years respectively, outperforming its sector by some margin. It has a current distribution yield of 4.46% 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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8. UK Equity Income selection – Neil Woodford’s Equity Income, 4% anticipated yield*
Neil Woodford, one of Britain’s best known fund managers, launched his first fund last year in the form of the Woodford Equity Income Fund. The fund is now £4.7bn in size with a primary investment objective to provide investors with long-term appreciation through investing in stocks primarily listed on the UK stock exchanges. Up to 20% may be invested in international companies. The income objective is 10% higher than the FTSE All Share Index yield with an anticipated annual yield of 4%.The CF Woodford Equity Income fund has the same investment approach employed by Mr Woodford in his time at Invesco Perpetual and offers quarterly income payments.
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 understandably caused great interest at its launch last June. A contrarian investor whose performance speaks for itself, this fund could provide an exciting income opportunity for long-term investors.”
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9. Asian Income selection – Newton Asian Income, 5.43% yield*
For investors wishing to look wider afield for income opportunities the Asian Income Fund from Newton aims to achieve income together with long-term capital growth predominantly through investments in securities in the Asia Pacific region (excluding Japan, but including Australia & New Zealand). The fund may also invest in collective investment schemes. The Newton Asian Income Fund was launched in 2005 and is now over £5 billion in size. Income payments are made on a quarterly basis.
Fair Investment view: “The fund has produced a cumulative return of 75.2% over the last five years compared to a 44.5% return of its sector benchmark and is Silver rated by independent research and ratings company Morningstar OBSR. This fund offers investors exposure to some of the fastest-growing emerging markets while also investing in more developed Asian economies, and could appeal to those income seekers who want to build a diverse income portfolio.”
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10. Managed Income selection – Jupiter Merlin Income Portfolio, 2.9% yield*
The final income idea in our Top 10 is a multi-manager fund, the Jupiter Merlin Income Portfolio. 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 UK equities and fixed interest at 48.5% and 34% respectively.
Fair Investment view: “The current yield is 2.9% and income is paid quarterly. The fund is managed by the highly experienced Jupiter Merlin team headed by John Chatfield-Roberts 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.
All fund data correct as at 30/04/2015
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 depends on your individual circumstances and may be subject to change in the future.
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 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.
