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Isa income fund tips: Get a boost with funds that pay 4pc to 6pc income

The top recommendation from the fund experts quizzed by Telegraph Money. The reason for its popularity is that the manager, Neil Woodford, is viewed as one of Britain’s best investors. Mr Woodford worked at Invesco Perpetual for 25 years before setting up his own firm last year, and during this period he turned a £10,000 investment into £230,000.

His biggest bets are drug firms AstraZeneca and GlaxoSmithKline. Cigarette makers Imperial Tobacco and British American Tobacco, viewed as reliable dividend payers, are also in the top 10. According to Philippa Gee of Philippa Gee Wealth Management, this fund is “ideal for long-term investors who want to see their capital grow over time”.

Yield: 4pc

Dividend frequency: Quarterly

Total return since launch last June: 15pc, against 5pc for average UK income fund

Total charge: 0.75pc (“C” share class)

J  O Hambro UK Equity Income

This fund is a consistent performer that currently has half its portfolio invested outside the FTSE 100 index. According to Jason Hollands, of Tilney Bestinvest, the fund shop, this approach will stand the fund in good stead over the coming years.

“These are tricky times for income investors because some of the main income-generating sectors, such as utilities, have seen valuations pushed up to extreme levels [see page 8]. Thankfully, this fund avoids these names and instead looks for the British businesses that are well placed to grow their dividends in the years to come,” Mr Hollands said.

Yield: 4.1pc

Dividend frequency: Quarterly

Total return over five years: 79pc

Total charge: 0.8pc (“A” share class)

Murray International

Murray International, a global investment trust established in 1907, has an impressive track record for growing both capital and income. Over the past decade it has returned 222pc, well ahead of the 117pc produced by the average rival fund. During this time the income that the fund has paid has also increased significantly, from 18p per share to 45p, a rise of 140pc.

The manager, Bruce Stout, has a cautious investment style and sticks to reliable dividend payers located in the Asian and emerging market economies. He also holds 10pc of the fund in high-yielding bonds to help keep the fund’s income on track.

Yield: 4.4pc

Dividend frequency: Quarterly

Total return over five years: 42pc

Total charge: 0.7pc

Newton Asian Income

According to Darius McDermott of Chelsea Financial Services, the fund shop, British income investors should broaden their horizons and consider this fund, which buys dividend-paying shares in Asian economies.

Managed by Jason Pidcock, the fund taps into the dividend culture that is becoming more pervasive in Asia. Mr McDermott described the fund as a “reliable dividend payer” that would not let investors down.

Yield: 4.5pc

Dividend frequency: Quarterly

Total return over five years: 70pc

Total charge: 0.82pc (“W” share class)

Jupiter Strategic Bond

For the more conservative income investor who does not want to put their money in shares, this fund is seen as a good alternative.

This is a “go anywhere” bond fund that is not constrained to invest in just one part of the bond market, such as government or corporate bonds. Ben Willis of Whitechurch Securities, the wealth manager, said this flexibility would stand the fund in good stead when interest rates rose.

Yield: 4.5pc

Dividend frequency: Quarterly

Total return over five years: 44pc

Total charge: 0.74pc (“I” share class)

FUNDS THAT PAY 5PC

Merchants Trust

Merchants, another venerable trust, established in 1889, holds a portfolio of around 50 shares. The manager, Simon Gergel, buys shares with high yields; nearly a third of the fund’s money is in just five shares, Royal Dutch Shell, HSBC, GlaxoSmithKline, BP and British American Tobacco, all of which currently yield more than 5pc.

Ms Gee said: “This fund invests in companies that pay decent dividends. Its 5pc yield is certainly eye-catching and much higher than its rivals’.”

Yield: 5pc

Dividend frequency: Quarterly

Total return over five years: 70pc

Total charge: 0.59pc

TwentyFour Dynamic Bond

This is seen as the pick of the bond funds that offer a yield of more than 5pc. “Dynamic” means the same as “strategic”, so the fund invests in different types of bond, in effect lending money to a range of governments and companies across the globe in exchange for interest payments. At present, bonds issued by banks account for 30pc of the fund.

“This is a fund management company that invests only in bonds; I like the fund because it is a specialist in its field,” Mr McDermott said.

Yield: 5.1pc

Dividend frequency: Quarterly

Total return since launch (April 2010): 45pc

Total charge: 1.35pc (“A” share class)

Legg Mason Global Multi Strategy Bond

This was the bond fund for those who wanted monthly income, said Mr Willis. “Not many bond funds offer a yield this high and make the payments on a monthly basis. This is a very diverse bond fund which invests across international markets, including government, corporate and emerging market bonds,” Mr Willis said.

Yield: 5.1pc

Dividend frequency: Monthly

Total return over five years: 15pc

Total charge: 0.57pc (“I” share class)

FUNDS THAT PAY 6PC OR MORE

Royal London Sterling Extra Yield

Investors who want 6pc income need to take on a higher degree of risk. According to Ben Yearsley of Charles Stanley Direct, the fund shop, this will involve choosing a fund that buys lower-quality bonds, whose issuers are more likely to go bust and cease interest payments.

Mr Yearsley picked the Royal London Sterling Extra Yield fund because the manager, Eric Holt, was one of the most experienced investors in this field.

“Eric Holt has been managing money for a long time and has proved himself as someone who chooses wisely and avoids the bonds that end up defaulting,” Mr Yearsley said.

Yield: 6.6pc

Dividend frequency: Quarterly

Total return over five years: 77pc

Total charge: 0.59pc (“Z” share class)

Fidelity Enhanced Income

This fund invests in big blue-chip firms, such as BT Group and HSBC, but yields significantly more than the income offered by these shares because it uses a specialised strategy to magnify the income.

In effect, the manager sells investors’ right to future capital growth in return for cash, which is used to boost the “natural” income produced by the holdings.

This involves the fund agreeing to share any future capital gains with a third party. In return, the other party pays a fee, which creates immediate, upfront income. This can be distributed to unit holders as a stream of income. However, financial advisers warn against holding this type of fund in isolation.

Yield: 6.3pc

Dividend frequency: Quarterly

Total return over five years: 56pc

Total charge: 0.97pc (“W” share class)

Read the other articles in our series:

– The best funds to hold for the next 10 years

– The Isa funds tipped to shine until 2020

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Isa income fund tips: Get a boost with funds that pay 4pc to 6pc income Reviewed by on . The top recommendation from the fund experts quizzed by Telegraph Money. The reason for its popularity is that the manager, Neil Woodford, is viewed as one of B The top recommendation from the fund experts quizzed by Telegraph Money. The reason for its popularity is that the manager, Neil Woodford, is viewed as one of B Rating:
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