Income – the best form of growth?

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All information is correct as at 30 June 2021 unless otherwise stated.

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When it comes to investing there’s no ‘one size fits all’.

We all have different needs, attitudes to risk, and time horizons. Our personal interests and goals have a big impact on how we think about money. And each stage in our lives brings different priorities.

Some people want an income from their investments to supplement their wages. Or because they’re in, or getting close to, retirement. But if you don’t need the extra income now, or you’ve got a long way to go until you retire, your goal is probably to grow your money as much as you can. You might be investing for a different long-term goal, like buying a house, or to provide a nest egg for future spending.

In that case, getting an income from your investments is probably less of a concern.

Perhaps it shouldn’t be though. Yield can make a big difference to your investment pot over the long run if you reinvest it.

If your focus is long-term growth, you can choose to reinvest any dividend income. This buys more shares, from which more dividends are paid. And so the cycle continues. This is called ‘compounding’. It can be one of the most powerful ways to grow your investment over the long run.

A huge difference from something simple

This example shows how much difference reinvesting income can make.

If you invested £10,000 in a fund that tracks the broader market of UK companies 20 years ago, it would now be worth £14,647*. You would’ve also got back £6,896 in income – giving you a total return of £21,543.

If you didn’t need the income and chose to reinvest it instead, your total investment pot would’ve more than doubled and grown to £26,805. As always though, income and yields are variable and not guaranteed. Past performance isn’t a guide to what you’ll receive in future.

The chart below shows the difference between these two options, in terms of what happens to your remaining investment once you decide what to do with the income. It also shows the stock market rises and falls in value. It’s not a one-way street and you could get back less than you invest in the short term.

Returns from the UK stock market

Past performance is not a guide to the future. Source: *Lipper IM, to 30/06/2021.

Invest with a professional

Equity income funds are a great way to access this style of investing. They hold lots of different companies, so aim to smooth out both the share price and dividend ups and downs that comes from holding a single share. For most investors this is also easier than trying to do all the legwork yourself.

The UK has historically been one of the best places for income. UK companies have a long history of paying dividends and investors are often put at the centre of corporate decisions. 2020 threw a bit of a spanner in the works though. The Covid-19 crisis called into question whether dividends could, or should, continue to be paid.

Some natural hunting grounds for income, like banks and oil, were hit hard as the pandemic reduced demand for travel and disrupted economic growth.

The UK, as a major dividend paying market and one in which banks and oils feature heavily, was especially affected.

There has since been a recovery in the dividends paid by some companies. However, it’s unlikely these payments across the market will be as high as pre-pandemic levels. This isn’t necessarily a bad thing though, as some companies and industries will use this as a chance to pay more sustainable dividends.

We still think the UK is a great place to invest for income. Lots of companies are in a good position to pay dividends over the long run, even if they’re slightly lower than they used to be. The longevity of our dividend culture is attractive to investors and is likely to continue.

Not only that, the UK has been out of favour in recent years, with Brexit and the coronavirus acting as two key headwinds. This means there could be some hidden value in our home market.

The UK isn’t the only place with income potential. Investing overseas, or in different assets, offers not only opportunity, but diversification too. Global markets offer opportunities to invest in industries that are less well-represented in the UK and will perform better at different times.

Income ideas

Investing in these funds isn’t right for everyone. Investors should only invest if the fund’s objectives are aligned with their own, and there’s a specific need for the type of investment being made.

Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a diversified portfolio. All yields quoted are variable and not a guide to the income you’ll receive in future. Each of these funds take their charges from capital, which can boost income potential but reduces capital growth.

Artemis Global Income

Yield – 2.66%

Jacob de Tusch-Lec hunts across the globe for income opportunities. He isn’t a conventional income fund manager and, as a natural contrarian, he’s prepared to invest in less popular companies. He mainly invests in larger and medium-sized companies based in developed markets, like the US and UK. But he also invests in some higher-risk areas like emerging markets and smaller companies. Although they don’t currently feature in the fund, the manager can invest in high-yield bonds and derivatives, both of which add risk.

De Tusch-Lec combines his company selection with a view on where the global economy is headed and tilts the portfolio according to his outlook. Importantly, he tries to invest in companies that should make enough cash to pay dividends.

Find out more about Artemis Global Income, including charges

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Aviva Investors UK Listed Equity Income

Yield – 3.40%

Chris Murphy and co-manager James Balfour are experienced income investors and follow a simple approach to equity income investing. For this fund, the managers look for quality UK companies that are market leaders and have an advantage over competitors. Importantly, they should generate lots of cash, which the managers believe can be sustained over the long term and used to pay dividends to shareholders. The fund invests in a relatively small number of companies, as well as some smaller companies, both of which add risk. The emphasis on dividends and dividend growth makes this a more conventional UK equity income fund.

Find out more about Aviva Investors UK Listed Equity Income, including charges

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EdenTree Higher Income

Yield – 3.60%

This fund aims to pay a higher income than lots of others. It does this by investing in different assets, including global company shares, bonds and cash. This can include higher-risk emerging markets companies and high-yield bonds. Shares form most of the fund and have the potential to generate an income and long-term growth. Some investments in bonds and cash provide diversification and could reduce part of the ups and downs that normally come with only investing in shares. This means it could offer some balance alongside equity funds in a more adventurous income-focused portfolio.

Find out more about EdenTree Higher Income, including charges

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Jupiter Income

Yield – 2.90%

Ben Whitmore invests differently from lots of other income managers. He uses a ‘value’ approach to investing. He looks for UK companies that have fallen out of favour with investors but have the potential to recover. Investing in unloved areas of the market could offer a good dose of diversification to an equity income portfolio. While different investment styles come in and out of favour, Whitmore is disciplined in his approach and has honed his process over a number of years. The fund could sit well within a portfolio that has a more traditional approach. It invests in a fairly small number of businesses, so each one could meaningfully impact performance, though this is a higher-risk approach.

Find out more about Jupiter Income, including charges

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Troy Trojan Global Income

Yield – 2.99%

James Harries invests in global, dividend-paying companies, and aims to grow income sustainably over time rather than seeking higher but potentially unreliable yields. This is a concentrated fund of between 30-40 holdings. That means each company can have a significant impact on performance, although it’s a higher-risk approach. He focuses on large, financially sound businesses that could provide the fund with some resilience during market downturns, though it might lag in rapidly rising markets.

Harries mainly focuses on developed markets, like the US, Europe and the UK. While he has the flexibility to invest in higher-risk emerging markets, he tends to avoid them, preferring companies that sometimes sell their products in these regions. The manager also has the flexibility to use derivatives which, if used, increases risk. A focus on quality means the fund could work well alongside others with a different style, like a value approach.

This fund invests in Hargreaves Lansdown plc.

Find out more about Troy Trojan Global Income, including charges

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This article isn’t personal advice. All funds and the income they produce can fall as well as rise in value, so you could get back less than you invest. If you’re not sure if an investment is right for you, ask for financial advice.