Staying responsive

In this prolonged period of ultra-low interest rates, thousands of income-seeking investors have looked to new asset classes, including equities, to generate the yield they need. But there are some logistical challenges to navigate when investing this way, particularly for those who need regular and predictable income. In that context, new research from the AIC showing that half its members now pay quarterly dividends represents good news.

Most of the equity investments held by collective funds pay dividends twice a year – an interim payment and then a final dividend. Traditionally, investment funds have tended to mirror this distribution pattern, paying their own dividends to investors bi-annually – or, in some cases, only once a year.

However, while the frequency of dividend payment makes no difference to the total income that investors receive from a fund, bi-annual or annual distributions can be inconvenient for those investing specifically to generate income. They typically want to receive smaller payments more regularly, rather than having to eke out a larger distribution over a longer period.

The 50 per cent of investment companies that now offer quarterly dividends are responding to this need. Effectively, they’re smoothing out income distributions, distributing the same amount of yield through four payments rather than in two much larger dividends.

Indeed, some investment companies are now going even further, switching to monthly dividend distributions. The AIC highlights eight funds now doing exactly that, all from more specialist sectors such as property and debt, which have been a happy hunting ground for income seekers in recent years.

The trend to more regular dividend payments in the closed-ended fund industry is now well established.  In 2016, 43 per cent of investment companies paid dividends quarterly; this rose to 46 per cent in 2017 and now stands at 50 per cent. It’s an important indication that investment companies understand they provide more than just a fund management service; the investors holding their shares are committing their money as part of an ongoing financial planning exercise and their needs should be considered in that context. Generating strong investment returns is the primary responsibility of the fund, but it’s not the only thing investors are looking for.

In fact, investment companies have a good track record of recognising this broader role. For example, many funds have been offering regular savings schemes and children’s investment plans for decades. This breadth of service is an important competitive differentiator, helping the sector win hearts and minds amongst retail investors, in particular, who still tend to hear more about open-ended funds than investment companies.

Looking ahead, the demand for regular income isn’t likely to dissipate in the foreseeable future. We do now seem to have moved back towards a phase of monetary policy tightening, but it is likely to be gradual and limited; it will be some time before income seekers can expect to earn bountiful returns from cash investments.

Moreover, the rise and rise of income drawdown vehicles for those converting pension savings into regular income without buying an annuity is creating new demand for funds that offer generous and consistent distributions. Investment companies will have an increasingly significant role to play here too.