INVESTING TIPS: Top fund and trust ideas for income investors

By Simon Lambert Income investing is not just for those who wish to draw a cash return on their portfolio, reinvested dividends are also a great way to build solid growth over time.

If you had invested £100 in the UK stock market 1945 it would have been worth £4,027 at the end of 2011 with dividends reinvested, or £227 without, according to the oft-cited Barclays Equity Gilt study.

Funds and investment trusts are an ideal method for income investing, as by holding a basket of equities or assets they spread risk.

Nice little earner: Reinvesting dividends gives investments a turbo boost over time - alternatively income from investing can be drawn by those who need it

The huge number of funds and investment trusts on offer can be confusing though. Fortunately, This is Money's experts have some ideas to get you started.

They have picked funds and trusts to use as starting points for what will hopefully be a successful income investing career.

Of course, which fund is best for you depends hugely on your individual circumstances and what investing story you think will unfold. So, always do your own research, choose your investments carefully and hopefully you will make your own good investing luck.

How to use our fund and investment trust ideas

This is Money asks our experts to suggest investments for a variety of investors.
These are people with a long history in the investment field and looking at their choices gives you some vital pointers to the world of investing.

But remember, these are just suggestions and whether a particular fund is right for you is your own decision and requires deeper research.
Their tips are suitable for investors opting to use an Isa wrapper or not. Go to the bottom of the page to find out why we recommend investing through an Isa.

Read the tips, follow the links to the funds' performance and read This is Money's Investing Section to gather ideas. If you have any doubts, talk to an IFA [find an adviser].

Fund ideas

Adrian Lowcock, of BestInvest, highlights Newton Global Higher Income

He says: ‘With interest rates having been close to 0% and likely to stay that way for some time investors have been increasingly in the search for yield.  Once equity income was the preserve of the UK, but things have changed with European equities looking cheap and Asian companies having matured there is scope for investors to diversify their equity income to reduce risk and volatility.’

Mark Dampier, of Hargreaves Lansdown, highlights, Invesco Perpetual Income

He says: 'This is a top rated fund, and is managed by one of the best managers in the UK - Neil Woodford, whose long track record is robust to say the least.  The equity income market has suffered from problems emanating from the US sub-prime mortgage market and of course its own problems with a highly indebted consumer and slowing housing market. In this environment, Neil Woodford is sticking with his long held strategy favouring companies that should generate decent returns and provide solid dividends regardless of a challenging economy.'

Darius McDermott, of Chelsea Financial Services, highlights, Newton Global Higher Income

He says: Reinvested dividends contribute two-thirds of total returns over the long term. Most UK investors tend to stick to UK equity income funds but global funds offer diversification and access to some even better dividend paying companies around the world. This fund has achieved a consistently high yield and has a good track record since its launch. It is one of my favourites in the new Global Equity Income sector.

Rob Crawshaw, fund analyst at Brewin Dolphin, highlights Threadneedle UK Equity Income

He says: Threadneedle UK Equity Income is a traditional UK equity income fund, whose portfolio is typically dominated by blue-chip names with strong balance sheets, sustainable cash flows and a growing dividend. Manager Leigh Harrison has an impressive track record, outperforming the FTSE All Share over five of the past six calendar years. The fund has a current prospective yield of around 4%.

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Investment trust ideas

John Newlands, head of investment trusts research at Brewin Dolphin, highlights Finsbury Growth & Income

He says: ‘Finsbury Growth & Income is run by the talented Nick Train. While past performance is no guide to the future, it is worth noting that in Nick’s hands this trust has produced sector-leading performance over the past decade and presumably he has learned something along the way.

‘The trust’s record has not gone unnoticed by the market, which is why its dividend yield is ‘only’ 3% but I still regard it as an attractive prospect even when it trades at a very small discount or even a premium of 1-2% of net asset value.’

John Newlands also highlights HICL Infrastructure

He says: ‘Infrastructure funds, too, are proving immensely popular with private investors, many of whom love the idea of deriving a strong flow of dividend income from a portfolio primarily founded upon government and local government projects such as hospitals and police training colleges.

‘Here I would highlight HICL Infrastructure Company, run by former structural engineer Tony Roper and which has just over 80% of its portfolio in the UK and the remainder Europe. HICL yields 5.8% and, like Finsbury above, is still worth considering on a small single figure premium to NAV.’

Alan Brierley, of CanAccord Genuity's, investment trusts report, highlights Edinburgh Investment Trust

Analyst Alan Brierley has compiled a comprehensive report on investment trusts for broker CanAccord Genuity. Edinburgh Investment Trust was an income trust that he highlighted as overweight, meaning over the next 12 months it is expected to outperform its peer group. It has been run by Neil Woodford, of Invesco Perpetual, since 2008.

He says: ‘‘The manager believes there are downside risks to UK economic growth while the Eurozone is on the verge of a recession. Despite this gloomy macro prognosis, the manager believes there are a number of companies that can still deliver sustainable dividend and earnings growth. Somewhat surprisingly, those companies with the greatest upside potential [are] trading on compelling valuations – what the manager described last year as a once in a decade opportunity.

‘There is a focus on quality growth companies and the portfolio is significantly overweight in pharmaceuticals (GlaxoSmithKline, AstraZeneca & Roche), telecoms (BT, Vodafone) and tobacco (BAT, Reynolds, Imperial Tobacco & Altria) stocks.’

Brierley also highlights that the Edinburgh trust dividend yield is 4.3%, beating the current FTSE All Share yield of 3.5% and higher than Invesco Income, at 3.8 per cent and High Income, at 3.82 per cent, funds also run by Woodford. The trust’s total expense ratio is considerably lower, however, at 0.68 per cent, compared to 1.68 per cent, but it does currently trade at a 5 per cent premium to its net asset value.

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