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Equity income funds are the best investment to fight inflation
While some savings accounts now pays as little as 0.01 per cent, equity income funds can offer yields of 4 per cent a year or more.
Equity income funds typically invest in the shares of UK blue-chip companies that pay generous dividends, which you can either take as income or reinvest.
The value of your capital may also increase if stock markets rise and you can take both the income and growth free of tax inside a stocks and shares individual savings account (ISA).
Equity income funds have always been popular among retired savers, but look more attractive than ever as alternatives such as cash, bonds and annuities offer slim pickings.
Funds reduce some of the risks of investing in stocks and shares by spreading your money among 30 to 50 different companies.
However, they may still be too dangerous for many as you remain exposed to a stock market shock.
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Oil firms have paid well to those who invested
Some analysts believe inflation could hit 3 per cent next year and Brian Dennehy, managing director of dealing hub FundExpert.co.uk, says this will reduce the value of investments: “The more inflation there is, the more income growth you need.”
This favours equity income funds because they offer higher income than rival asset classes.
Dennehy says: “Cash, bonds, property funds and gold are no longer a solution for investors seeking a growing long-term income.”
Equity income funds offer the prospect of income growth because most companies aim to increase their dividend payouts over time.
Dennehy says that if a 60-year-old invested £100,000 in an equity income fund yielding 5 per cent a year, they would get £5,000 income in year one.
“If the fund increased annual income by 5 per cent a year that income would be worth £9,900 after 15 years, or £18,987 if it rose 10 per cent a year.”
There are no guarantees, as cash-strapped companies are free to reduce dividends or even scrap them altogether.
Barclays, Lloyds, Tesco, Sainsbury’s, British Gas owner Centrica and insurer Aviva are just some of the household names to cut their dividends in recent years.
Oil giants BP and Royal Dutch Shell both yield more than 6 per cent, but their dividends are under pressure from low oil prices.
Dennehy tips JOHCM UK Equity Income, which currently yields 4.29 per cent, worth 3.54 per cent after deducting its 0.75 per cent annual fee.
It has delivered a total return of more than 80 per cent over the past five years in share price growth, with reinvested dividends. Schroder Income yields 3.69 per cent, or 2.94 per cent after charges, with total returns of 95 per cent over five years.
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Gold used to be the safest bet to secure savings
Dennehy suggests investors could look further afield, with Schroder Asian Income returning more than 90 per cent over five years.
Darius McDermott, managing director at advisers Chelsea Financial Services, says UK equity income funds have benefited from the sharp fall in the pound since the Brexit vote.
He tips Marlborough Multi Cap Income, which invests in both big and small UK companies and currently yields 4.67 per cent, or 3.92 per cent after the annual charge.
It has returned 107 per cent over five years. He also rates Rathbone Income, which yields a lower 3.3 per cent before charges, but which has increased dividends in 19 out of the past 20 years.
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Some savings accounts now pay as little as 0.01 per cent
Most equity income funds have initial charges of 5 per cent, but you can avoid these by investing through a fund platform such as Bestinvest, Chelsea Financial Services, Fund Expert or Hargreaves Lansdown.
However, they may be too risky for many older investors, who should invest only if they can withstand short-term market volatility. Y
ou should also avoid putting all your eggs in one basket and leave some of your savings in cash for financial emergencies.
Invest in equity income funds to fight inflation have 676 words, post on www.express.co.uk at 2016-10-26 15:01:54. This is cached page on WBNews. If you want remove this page, please contact us.
