Many savers, old and young, invest with the aim of producing as much income as possible – either to see them through retirement, or with the goal of achieving greater financial freedom.
However, investing so that a payment reliably lands in your bank account every month is a challenge. For one thing, lots of investments only pay income annually, quarterly or twice a year.
Laith Khalaf, of investment firm AJ Bell, said: “Unfortunately the stock market hasn’t arranged itself into a neat formation where whatever you invest in you will get a monthly payment. Instead, most stocks pay dividends biannually or quarterly, and it’s the same with funds.”
If you want to receive a monthly income, then these are your main options: to piece together a spread of investments that pay out somewhat sporadically, or invest in a monthly income fund.
What are monthly income funds?
Monthly income funds typically receive dividends or bond coupon distributions from their underlying assets on a biannual or quarterly basis. However, the funds are structured to pay out monthly – this is achieved by holding back some income in reserves and staggering it across the year.
There are more than 100 monthly income funds in the UK, and they are most commonly invested in either equities or bonds, or both.
Mr Khalaf tipped Man GLG UK Income Professional, which has an ongoing charges figure of 0.9pc, invests in top dividend-paying companies such as Shell, HSBC and BP, and has a relatively attractive yield of over 5pc.
Another option is Fidelity Strategic Bond, which invests in government debt, has an ongoing charges figure of 0.6pc, and currently yields 3.28pc.
Remember, that income is not guaranteed – and previous yields are not a reliable guide of what you will receive in future.
Also, bear in mind these funds do something you could just do yourself by holding a non-monthly income generating fund and holding cash in your account. For this reason they are generally better-suited to investors who want a more “hands off” approach.
Jason Hollands of investment platform Bestinvest said: “While there are some perfectly OK monthly income funds out there, I’m not convinced that it makes sense to choose a fund based on its distribution schedule, rather than the strength of the investment process and track record of the manager.
“You will limit yourself too narrowly; there are roughly 100 monthly income funds out there, which is a tiny proportion of the overall universe of thousands of funds and trusts to choose from.”
The dividend-paying stocks option
An alternative is to go for income stocks – companies with a reputation for paying dividends to investors. The UK stock market is a great place to hunt for income stocks, commonly found in sectors like telecommunications, utilities and oil and gas, which make up a significant proportion of the FTSE 100.
The index itself has a generally attractive average dividend yield of 3.6pc, but some companies will pay out even higher yields than this.
However, it is not just the yield you should look at when assessing dividend-paying stocks, but also the dividend cover. This is the company’s earnings per share (EPS) dividend by its dividend per share (DPS), and it helps investors work out whether the company has sufficient cash on its balance sheet to cover future payouts.
A dividend cover of less than 1.5 is generally considered low, implying the company might cut its dividend in future.
Just 10 stocks on the index are forecast to pay dividends worth £46.6bn, or 55pc of the forecast total, in 2023, according to AJ Bell. The investment firm expects HSBC to be the single biggest paying stock in the FTSE 100 in 2023, followed by Shell, British American Tobacco, Glencore and Rio Tinto.
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