Dividends delivered

Investors and advisers looking for income naturally pay attention to yield data. The yield on a fund gives you a quick ready reckoner for working out how much income you can expect it to generate from the cash you have available to invest – and how that compares to what’s available from other funds.

However, yields only give you a snapshot of a moment in time. They represent a calculation made at the prevailing share price when you look up the data – as soon as the share price changes, so will the yield. In a few years’ time the quoted yield on a fund may look very different to where it stood when you invested; you’re not earning more or less income, but the change in the yield suggests something different.

In this context, a small study conducted by the stockbroker and financial adviser AJ Bell makes interesting reading. It analysed a string of investment companies, in each case calculating the yield today investors would be enjoying on an investment made 10 years ago; in other words, the income that investors are now earning on holdings acquired for the long term.

The results might surprise you. While most income seekers would jump at the chance to acquire a mainstream, well-managed fund offering a yield of 3 or 4 per cent in today’s low interest rate environment, the most generous investment companies on a 10-year basis have delivered several times that much. Three of the top funds, Henderson Smaller Companies, BlackRock Smaller Companies and the UK Equity Income sector’s British & American have delivered yields above 10 per cent, if the current yield is recalculated according to the fund’s share price a decade ago.

Nor are these double-digit yielding figures just eye-catching outriders. In all, AJ Bell found no fewer than 19 investment companies with a 10-year yield of more than 7 per cent.

Investors and advisers familiar with the Association of Investment Companies’ “Dividend Heroes” rankings will not be surprised to find that many of the funds which appear in this analysis are also amongst the top long-term yielders. The list is comprised of funds that raise their dividends year after year – and have done so for 50 years in the case of the leaders – which is an important part of the explanation of why the long-term yield data looks so good.

The AJ Bell exercise is an artificial one, of course – not least because the way in which a fund’s share prices has moved, for good or for ill, over the past 10 years will also have had a significant effect on the data. But the precise figures don’t really matter: the takeaway here is a reminder that if you’re looking for reliable income over the longer term, current yield data is less important than seeking out funds with a track record of delivering what you need.

Remember, investment companies have certain advantages in this area. Most notably, they are unique in the collective fund universe in being allowed to retain some dividend income in bumper years in order to sustain or even increase pay-outs in leaner times. Over time, these reserve funds prove invaluable, particularly for investors looking for a steady stream of income rather than an anxiety-inducing dividend record characterised by volatility.