On the hunt for income?

Where do investors find reliable yield as inflation continues to soar? A list of more than 40 investment companies offering a yield of more than 3 per cent, published recently by the AIC, makes interesting reading. It’s not so much the juicy income on offer that catches the eye – generous though some of these yields are – but the consistency.

High yields, after all, can be a red flag. Most obviously, since the yield is determined by dividing dividend income by share price, a high number may simply reflect a sell-off of the shares. It may even indicate that the market is expecting disappointing news about the dividend. a

In the case of the 42 funds identified by the AIC, however, a screen provides some reassurance. To make the list, funds had to have increased their dividends every year for the past five years. That track record doesn’t mean any of these funds will continue to hike their pay-outs, but it does give you some comfort that their yields aren’t simply a signal that the fund is bombed out.

We know, of course, that consistency of income is an important part of the attraction of investment companies. Their ability to smooth out distributions by retaining income in stronger years to fund pay-outs in leaner times is unique amongst collective investment vehicles, and especially valuable when income is thin on the ground elsewhere.

However, we tend to think of that story as being confined to certain pockets of the investment companies sector. A significant number of the AIC’s dividend heroes, the funds that have raised pay-outs every year for 20 years, sit in the UK Equity Income sector, or other income-focused sectors.

What’s striking about this latest list in that regard is the broad range of sectors represented. The 42 funds the AIC identifies do include a number of UK Equity Income investment companies – and no fewer than eight dividend heroes – but there are also representatives from the Debt sector, from Private Equity, Renewable Energy Infrastructure, Property, Infrastructure and more.

Indeed, it would be perfectly possible to build a well-diversified portfolio – by geography, by asset class, and by market cap – simply by making selections from this list of funds. You probably wouldn’t want to limit yourself in that way, but it gives an idea of the range of funds on offer.

What does this tell us about the investment companies sector? Well, at least three important things.

First, if you’re looking for a decent level of income, with the potential for consistency, investment companies offer a happy hunting ground. The income on offer from the sector won’t always be market-beating, but the smoothed profile of distributions is very attractive in turbulent times.

Second, the sector continues to be the place to look for investment diversity. It gives you a way into to a number of asset classes that, for retail investors at least, it would simply be impossible to access anywhere else.

Third, and finally, this is a story about resilience. Investment companies have suffered for much of this year, struggling in a market sell-off that has seen equity prices fall sharply. Shares in closed-ended funds inevitably correct along with the rest of the market, but these funds are very much alive and kicking.