The secret to achieving consistent income

Volatility is one of the key metrics we use to gauge a fund’s risk level, but what if you’re investing for income? A fund’s volatility is measured on a total return basis, so will not tell you how reliable it is in terms of both paying out and growing a steady dividend.

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As most income investors will have personal or family liabilities that are likely to have a high level of consistency, a portfolio of funds that can meet that consistency as closely as possible can be invaluable. However, there are few tangible statistics and no easy way to measure and compare.

Crunching the numbers

We decided to crunch some numbers ourselves, looking at the IA UK Equity Income sector between the end of 2013 and the end of 2017. We recorded annual dividend growth, total dividend growth, and how many years in a row each fund managed to increase its dividend.

To get an idea of the income volatility, we captured the standard deviation between each year of dividend growth. Finally, we ran the funds’ yield differences between the start and end of the period.

It unearthed the IA UK Equity Income funds which, compared to the sector average, achieved an above-average dividend increase, but coupled with a lower-than-average standard deviation and a lower-than-average yield difference.

The best ‘all-rounders’

A total of nine funds in the sector managed to fit the bill.

The fund with the highest dividend growth between the start of 2014 and the end of 2017 is LF Miton UK Multi Cap Income at 64.22%. It is headed up by Gervais Williams and Martin Turner, who use their small-cap expertise to hunt for Aim-listed and small-cap stocks which can grow dividends faster than their larger counterparts over the long term. To minimise risk, the fund has a highly-diversified portfolio of between 120 to 160 stocks. The fund is also in second place for its income volatility.

In the second-from-top spot for its dividend growth is the Elite Rated Marlborough Multi-Cap Income fund, which is run by Siddarth Chand Lall. As with the Miton fund, Siddarth looks for hidden gems further down the cap spectrum which are often overlooked by many of his peers with an income mandate. He also has a diversified portfolio of stocks, which will usually contain at least 100 holdings at any one time.

Bronze place for dividend growth – while also boasting minimal income volatility and yield fluctuation – goes to FP Miton Income, which is managed by Eric Moore. This fund is more concentrated at 63 holdings and, while it is overweight small and mid-caps, still has more than half of its portfolio allocated to FTSE 100 stocks. Not only does it have one of the highest levels of dividend growth, it also has the lowest income volatility out of all nine funds.

The FundCalibre Elite Rated Standard Life Investments UK Equity Income Unconstrained is in fourth place for its dividend growth at 52.71%. Manager Thomas Moore looks for stocks across the cap spectrum, although he tends to have a small- and mid-cap bias. As with all SLI fund managers, his approach is a ‘focus on change’, which means he favours firms undergoing a restructure or a change in dynamic.

It’s so easy for clients to focus solely yield when investing for income. But as we know, this can lead to investors biting off far more risk than they can chew. It’s vital to take a step back and, rather than demand as much income as possible and as quickly as possible, to look at income growth and volatility. This will reduce risk levels, lead to a steadily rising income pay-out and keep everyone happy.

*Source: FE Analytics. Correct from 1 January 2014 to 31 December 2017.

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