Reliable income or total return?

David Prosser asks whether investors can have the best of both worlds.

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As financial advisers know well, investors come in different shapes and sizes. In particular, some are primarily focused on generating reliable income from their investments; others are more interested in long-term returns. Naturally, the right funds may be different for these two camps, but it isn’t always straightforward to work out who is best suited to what.

In that context, new research from QuotedData makes interesting reading. Its analysts set out to identify those investment companies which have delivered the best combination of income and growth, and done so consistently over time – in other words, which funds have offered dependable total returns.

The exercise is fascinating because most advisers will be very familiar with the Association of Investment Companies’ list of "dividend heroes". These are the funds that have raised their dividends each year for at least 20 years (several have racked up more than 50 years of increases). However, while such a track record is admirable, it doesn’t necessarily lead to outstanding total returns; some dividend heroes actually sit on relatively low yields and others have disappointed from a capital growth perspective.

QuotedData therefore set out to identify a different universe of investment companies. To do so, it applied three screens to performance: funds had to have a 12-month trailing dividend yield of at least 2.5%; they had to have increased income returns ahead of gilt yields over the past ten years; and they had to have outperformed the MSCI All Country World Index over both the last five and ten years on an annualised total return basis.

The aim was to identify investment companies delivering outstanding levels of total return – rather than those increasing dividends year after year. And the results may surprise you. Just nine funds passed all three tests. Of these, only Caledonia Investments overlaps with the dividend hero list (though Invesco Select Global Equity Income and CT Private Equity Trust are on the AIC’s “next generation” list of funds with more than ten years of consecutive dividend increases).

The other six funds on the list are a mixed bag, offering exposure to a bunch of different sectors. QuotedData identified BlackRock Sustainable American Income,

NB Private Equity Partners, JPMorgan Global Growth & Income, Henderson European Focus Trust, 3i Infrastructure and Gulf Investment Fund. Notably, not one UK stock market-focused fund got through all three screens.

Is the QuotedData selection superior to the AIC’s dividend heroes group? Not necessarily – the tests to make either selection are simply different, reflecting the practical reality that not everyone wants the same thing from their investments.

Indeed, for large numbers of investors, the dividend heroes will continue to have huge allure. They’re looking for a reliable source of rising income over time, rather than concentrating on total return. At a time of elevated inflation, that’s very attractive – particularly, perhaps, for retired investors depending on their portfolios for income to live off.

On the other hand, there will also be plenty of investors looking for a combination of income and growth over time. They may be looking to take some yield each year, or they may be purely focused on long-term returns. But either way, the QuotedData group may throw up some interesting opportunities.

In the end, it’s horses for courses. And for advisers who are building tailored portfolios of funds for clients with individual needs, these analyses can provide very valuable insight. There’s something for every client out there – as long as you know where to look.