In a recent post – Investing for income: Boost for DIY investors as FTSE 100 companies return £88.6 billion – we looked at the record levels of dividends that are being paid out this year and presented the findings of a recent study by AJ Bell for The Mail on Sunday that predicted even bigger payouts next year – good news for investors starved of income. In this article we consider how the DIY investor can benefit from this bonanza.

‘predicted even bigger payouts next year – good news for investors starved of income’

Those looking to take full advantage essentially have two options; they can either assemble a portfolio of individual shares that are well known for paying dividends – DividendMax  may be useful to help identify them – or they could purchase collective investments – either funds or investment trusts that are constructed to deliver income.

Either way, online technology makes it relatively simple and cost-effective to buy and sell stocks and funds, and it is now possible to track the performance of your investments from a range of devices.

If you’re checking the value of your holdings too regularly you may have strayed outside  your comfort zone in terms of your exposure to investment risk, but the judicious use of tools such as limit orders can automatically buy or sell on your behalf should the price you set be triggered.

Most platforms will offer a standard ‘dealing account’ as well as tax efficient ‘wrappers’ such as self-invested personal pensions (SIPPs) or Individual Savings Accounts (ISAs); you can ‘shelter’ up to £20,000 each tax year in an ISA (more) with all proceeds tax free. There is a tax relief boost on pension payments, but contribution restrictions now apply to additional rate taxpayers (more).

Even outside of these tax-efficient wrappers an investor is entitled to take up to £2,000 of dividend income tax free in the current tax year.

Above this limit dividend income is taxed at 7.5% at the basic rate and for higher and additional rate taxpayers, the tax is 32.5% and 38.1%.


Finding income yielding shares


There are plenty of sources of information to assist you in your search for income and DIY Investor carries weekly updates from DividendMax highlighting upcoming announcements and payouts (more).

The Holy Grail for the income investor is to find companies that can deliver dividend yield as well as ‘capital growth’ – increasing share price – over time.

The table presenting the results of the AJ Bell survey (here) shows a wide range of actual and predicted dividend yields and there is undoubtedly a temptation to just pile into the highest yielding; however, the company’s Russ Mould believes this can backfire saying: ‘There are few investments worse than a high-yielding stock where the dividend is then cut and the shares plunge in value as a result. It is adding capital injury to yield insult.’

He suggests a more sensible approach is to opt for shares with a record of dividend increases – he cites safety products manufacturer Halma or outsourcing group Bunzl – which may initially look unattractive with respective yields of 1.1% and 2.2% but have grown their dividends every year since 1979 and 1994.

‘find companies that can deliver dividend yield as well as ‘capital growth’

AJ Bell’s table has plenty to interest those looking for more instant gratification – Royal Mail is forecast to return 5.6% to shareholders this year, rising to 6.5% in 2019.

Those investing for income should ensure that they buy shares in their chosen company before it goes ‘ex-dividend’, which means that they are entitled to receive the next dividend payment.

Most important is to assemble a portfolio based on good quality companies with good dividend prospects; type Wheelie Dealer into the search box at the top of this page to see what one of our tame DIY investors thinks about the importance of quality.

Investing a little in yourself is rarely time wasted – there are plenty of sources of research on companies, and the financial pages of newspapers will give you a flavour for what is going on; platforms differ in how far they risk straying toward offering advice, but there is often a ‘house view’ and the dividend record of a company is usually detailed on its investor relations website or can be found relatively simply in its summary accounts.


Equity income funds and trusts


Often described as The City’s ‘best kept secret’ there are investment trusts that have delivered a growing income for shareholders, plus capital return on top, sometimes for decades (more).

Investment trusts that target income are ideal for investors because the way the investment companies are constituted they are able to build reserves of income for times when the wider dividend environment may be tough.

Thus they are able to dip into their reserves, or borrow against the trust, to deliver continuous annual dividend rises to deliver returns their shareholders would struggle to find elsewhere; investment companies trade on exchange like any other and invest across a broad spread of companies, and sometimes markets in order to maximise opportunity and diversify risk.

‘The City’s ‘best kept secret’’

Industry body, the Association of Investment Companies (AIC) identifies twenty two trusts that have dividend growth records extending beyond 20 years; forty- three have at least ten years of consecutive annual dividend increases.

Some of the trusts derive income primarily from UK listed companies although not just FTSE 100 shares and are therefore positioned to take full advantage of the recent boon in dividends; examples are Janus Henderson’s City of London Trust, JPMorgan Claverhouse, Murray Income (Aberdeen Standard) and Merchants (Allianz Global Investors).

More international trusts include Alliance, Bankers, Scottish Mortgage and Witan – (see more).

Those considering using investment trusts for income can see those trusts with the longest records of dividend growth at the AIC website.

There are also a large number of ‘UK equity income’ funds – unit trusts and OEICs – looking to deliver income based upon the generous dividends being given out by UK companies; probably the most talked about are Neil Woodford’s eponymous Equity Income Fund and the one that he used to run, Invesco Perpetual Income.

Unlike investment trusts, these funds cannot keep income back for lean times so their income payment record can sometimes be more variable.

Investment specialist FundExpert has identified ten UK income funds that have increased dividend payouts to investors in at least eight of the past ten years; top of its ‘saints’ list is Troy Trojan Income with dividend increases in each of the past ten years.

BlackRock UK Income, JO Hambro Capital Management UK Equity Income and Rathbone funds Blue Chip Income and Income have increased them in nine of the ten years.

Brian Dennehy of FundExpert, says income opportunities also abound outside the UK, particularly inAsia where he highlights Matthews Asia Dividend, Henderson Asian Dividend Income and Schroder Asian Income.

‘reinvested dividends can significantly grow an investor’s original sum’

Income funds typically offer investors two ways to participate – either by delivering income – ‘distributing’ – or accumulation units.

Broadly speaking, those that want control over their dividend income, either to fund their living expenses, or to invest elsewhere, should opt for income units; those that want to reinvest in that fund should choose accumulation units as these reinvest dividends automatically and can quickly add up if the fund’s underlying investments perform well.

While some investors will need a regular stream from an income fund, others will not; reinvesting income makes sense as part of a long-term investment strategy as reinvested dividends can significantly grow an investor’s original sum, in a similar fashion to compound interest.

Find out more about funds here and about investment trusts here; however, despite the fact that income investors are currently making hay, as the small print would have it, shares and therefore funds comprised of them can also fall in value, especially over the short term, so those looking to grab a share of the dividend bonanza, should aim to do so as part of a long term investment strategy.


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