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Before the early 1990s, experts generally considered 5% to be a safe amount for retirees to withdraw from their investments each year in order to provide a steady income stream, whilst also maintaining the current level of their savings.
However, sceptical as to whether this amount was correct, in 1994 a financial adviser called William Bengen conducted an exhaustive study of historical returns in the US, focusing on the severe market downturns of the 1930s and early 1970s.
He concluded that 4% was a more conservative – but also more sustainable – rule of thumb. Even taking extremely difficult markets into consideration, no historical case existed in which a 4% annual withdrawal exhausted a portfolio in less than 33 years.
The 4% rule is not a silver bullet – far from it: there are too many variables for each individual. But it is useful as a starting point if you are indeed investing for income and are using that money to help pay the bills.
It’s also useful to have in mind if you are looking to construct an investment portfolio that produces a natural income. If that portfolio can produce 4% each year, there is no need to dip into your capital.
While low interest rates have reduced income levels for cash and bonds in the past decade, and the more recent market crash caused by the COVID-19 pandemic has mean that company dividends have been cut, income investors will be relieved to know that there are still a number of funds in different asset classes that have a yield above 4%.
This yield is not guaranteed and can fluctuate, but the higher starting point may be of comfort.
1. Man GLG Income: yield 6.4%*
This UK equity income fund invests no less than 80% in UK companies of all sizes, but can also invest in continental European companies that derive a substantial part of their revenues from the UK. It also has the ability to selectively invest in corporate bonds – a flexibility that sets it apart from the majority of its peers.
2. City of London Investment Trust: yield 5.68%**
This is one of the longest-running investment trusts in the UK. It aims to provide growth in income and capital by investing predominantly in larger UK companies with international exposure. It has increased its dividend payment every year for the past 53 years and the board has committed to increasing the dividend again this year, using the revenue reserve if necessary.
3. VT Seneca Diversified Income: yield 5.3%*
This multi-asset fund aims to produce a high level of regular income, with the prospect of preserving the real value of capital in the long term. The managers have a value-focused style and will invest across all asset classes. Co-manager Mark Wright talked to us about special property holding that are producing more reliable income in his recent podcast.
4. M&G Emerging Markets Bond: yield 5.58%*
The manager of this fund uses her vast skill set to analyse the macroeconomic environment, and individual companies, to pick what she believes to be the best mix of bonds for this portfolio. The fund can invest in both government and corporate bonds, denominated in local currencies or in the US dollar (‘hard’ currency).
5. Premier Multi-Asset Monthly Income: yield 5.6%**
This multi-asset, multi-manager fund is designed to produce an attractive level of income which should grow over time. The team uses a broad range of assets, investments, managers and funds. Each core holding typically makes up between 3% and 5% of the portfolio and satellite positions each accounting for between 1% and 3%.
6. Murray International Investment Trust: yield 5.5%**
This global equity income trust can invest in both equities and bonds from all over the world. The portfolio is currently split with 53 equity holdings and 23 fixed income holdings**. Manager Bruce Stout told us why he prefers emerging markets over developed markets in a video interview recently.
7. Invesco Monthly Income Plus: yield 5.52%*
This bond fund has a flexible mandate and is designed to offer investors broad exposure to the UK fixed income market and provide a high level of income. Unlike many of its sector peers, it can also invest up to 20% in UK equities. It currently has 7.5% in equities and 92% in bonds*.
8. BMO MM Navigator Distribution: yield 4.8%*
BMO MM Navigator Distribution is a multi-manager, multi-asset portfolio, which generally contains between 25 and 35 individual funds, balancing diversification and risk. The managers are targeting a yield that puts the fund in the top 10% of income generators in its sector and this income is distributed on a quarterly basis.
9. VT Gravis UK Infrastructure Income: yield 4.8%**
This fund invests mainly in investment trusts exposed to different types of UK infrastructure; from railways and roads to GP surgeries and solar power. It can also invest in infrastructure debt. Investment advisor to the fund, Will Argent, told us why he believes income from infrastructure investments should hold up well in his recent podcast.
10. Schroder Oriental Income: yield 5.1%**
Launched in 2005, this Asian equity investment trust aims to provide income and capital growth by investing in Asia Pacific companies (including Australia and New Zealand) that offer attractive yields and growing dividend payments. The trust is skewed towards developed markets in the region, with more than three quarters of the portfolio invested in companies listed in Hong Kong, Australia, Taiwan and Singapore**.
*Source: fund factsheet, 30 June 2020
**Source: fund factsheet, 31 May 2020