Income has always been a part of a balanced investment strategy and the re-investment of dividends has been the basis of dramatic investment returns in the equity markets. Figures from Bestinvest show that £100 invested in equities in 1899 would be worth around £180 by 2011 without dividends re-invested but £24,133 with.
But as investors move into retirement, the ability of investments to generate consistent and rising income can become the more important consideration.
With inflation still running at around 5 per cent a year, very few assets have been able to outstrip or even keep up with inflation over the last couple of years. Investors in UK gilts, for example, are currently achieving yields of less than 2 per cent.
However, the reliance on total returns as a measure of fund performance is not a good measure of investment funds’ ability or willingness to pay dividends to investors. The 102 funds within the Investment Management Association’s UK equity income sector cover a wide range of strategies, from income and growth to higher income and the level of dividends paid out by different funds can vary widely.
In addition, the availability of information on the dividends paid by individual funds is frustratingly difficult for firms to get hold of.
For these reasons, Money Marketing has launched an annual dividend income survey to help IFAs more easily identify the highest-paying UK equity income funds and, almost as importantly, which funds have been able to consistently pay out dividends. The difference between the level of dividends paid out can be striking, with £10,000 invested in the top-paying fund generating £1,600 more than lowestpaying fund over the three years to the end of 2011.
Getting the right funds for clients who are relying on income from their investments to supplement other pension income can be critical to a client’s ability to maintain their standard of living in retirement and will only become more important if annuity rates continue their downward slide.
The ability for dividend re-investment to grow the value of investments should not be underestimated but once the accumulation stage of a clients’ life has ended, the ability to select the right funds to provide an income becomes the most important consideration.
The good news for income investors, whether for re-investment or those taking income, is that 2011 was a record year for dividend payments from UK companies, with £67.8bn in regular and special dividends paid out, and this is predicted to grow to £75bn 2012.