Four income funds for your ISA

When prices are rising, it’s important that income investors have a growing income stream that can match inflation.

Bond funds are probably not the best bet in this environment, as yields are already very low and, with most bonds, the income is fixed. So, investors are vulnerable to rising inflation and capital could be hit.

And while an optically high income on an equity fund may look attractive, in structurally challenged businesses is not going to protect you from inflation.

“Remember, when you’re buying shares or an equity fund, you’re buying the future and a growing dividend is one of the best ways to preserve the purchasing power of your investments,” commented James Yardley, senior research analyst at FundCalibre.

Four income-producing equity funds that invest in growing dividends

Guinness Asian Equity Income

This fund invests in companies across the whole Asia Pacific region, including Australia and is slightly different to its peers in that it is concentrated into just 36 equally-weighted stocks. It has a one-in, one-out policy, so conviction is always strong, and the managers are looking for a combination of capital and dividend growth. They take the unusual step of not analysing dividend potential until the final stage of their process and then they focus on companies that can sustainably grow their dividend into the future. Dividends in Asia fell sharply in 2020, as they did around the globe. This fund’s dividend however, held up better than the market in 2020 and rebounded by more than the market in 2021.

GAM UK Equity Income

The manager of this fund seeks to understand the cash-generative nature of companies as he believes this lies at the heart of their ability to pay dividends. “Capital appreciation will follow if a dividend is strong and growing,” he said. Launched in October 2017, it invests in companies of all sizes – from the very small and those listed on the AIM stock market, through to the FTSE 100. The manager believes dividends are the most important driver of total returns and, while he is targeting a yield higher than that given by the UK stock market, he is also looking for steady dividend growth.

M&G Global Dividend

This fund provides an opportunity to diversify income streams by investing globally in companies that provide stable and rising dividends. Commenting recently, the manager said, “We remain vigilant about the dividend outlook. Being selective will be paramount. Balance sheet strength is a key consideration in our company research to ensure that dividends are sustainable in the current climate. We take comfort from the fact that many of our holdings are carrying net cash. We continue to believe that the majority of our holdings can sustain dividend growth in the core 5-15% range over the long term, and that the fund is well placed to deliver on its objective of providing a rising income stream.”

BlackRock Continental European Income

The manager of this fund looks to identify undervalued European companies that offer reliable, sustainable dividends; potential dividend growth; and protection against inflation, with a lower level of risk. The investment process is focused on fundamental company analysis, with a strong awareness of macroeconomic trends. The mandate is flexible with regard to company size and country exposure, and he will actively manage the portfolio to find a balance of companies with large, but secure dividends, and those able to grow dividends faster than the average company. Research is central to the investment process and a key source of added value for the fund.

This article is provided for information only. The views of the author and any people quoted are their own and do not constitute financial advice. The content is not intended to be a personal recommendation to buy or sell any fund or trust, or to adopt a particular investment strategy. However, the knowledge that professional analysts have analysed a fund or trust in depth before assigning them a rating can be a valuable additional filter for anyone looking to make their own decisions. Past performance is not a reliable guide to future returns. Market and exchange-rate movements may cause the value of investments to go down as well as up. Yields will fluctuate and so income from investments is variable and not guaranteed. You may not get back the amount originally invested. Tax treatment depends of your individual circumstances and may be subject to change in the future. If you are unsure about the suitability of any investment you should seek professional advice. Whilst FundCalibre provides product information, guidance and fund research we cannot know which of these products or funds, if any, are suitable for your particular circumstances and must leave that judgement to you. Before you make any investment decision, make sure you’re comfortable and fully understand the risks. Further information can be found on Elite Rated funds by simply clicking on the name highlighted in the article.