Investing for income: A fund of knowledge

It pays dividends if you can spot a top income producer.

TRYING TO find the best income-producing funds can involve investors in complicated calculations as to who has delivered outstanding performance on a regular basis.

Premier Unit Trust Brokers, a Bristol-based firm of financial advisers, has carried out its own research into the subject, by comparing the difference between the dividends which funds were paying five years ago and the amount they paid last year.

The survey shows that the top 12 funds in its list have delivered average dividend growth of 74 per cent over this period. This compares with inflation, which grew by 16 per cent in the same five years.

In the top 12 for that period, which has been broken down into discrete one-year periods for greater accuracy, are: BWD UK Equity Income, Laurence Keen Income and Growth, Britannia UK General, Jupiter Income, River & Mercantile 1st Income, Aberdeen Prolific UK Blue Chip, Britannia Higher Yield, Fidelity Income Plus, Newton Higher Income, Hill Samuel Income & Growth and Guardian Income.

The average dividend yield for these funds is 3.34 per cent, which does not seem like much. But Peter Edwards at Premier makes the point that, to ensure a decent income, the primary focus of any fund must be excellent capital growth. The aim is to increase the value of the fund to the point that the increase in income is a product of the rapid expansion in the value of the overall investment.

Over the same period, the 12 achieved total returns (including both dividend and capital growth) of 85 per cent, increasing the income stream paid to investors.

"Accrued profits within the value of a fund provide a potential supplement to conventional dividend payment as and when required," Mr Edwards adds.

"Many holders of income funds `milk out' spending money from time to time, tax free within the current capital gains tax allowances," he continues. "This facility is the reason why the modest initial dividend yield on equity income funds is acceptable."

Premier Unit Trust Brokers, 54 Baldwin Street, Bristol BS1 1QW (0117 927 9806)