Laura Suter: Six funds to consider in times of volatility

As jittery markets produce nervous investors, Laura Suter unearths the funds that pay out more than the average 4.9% that is forecast for the FTSE 100 and hence could be useful options in these choppy markets

The jittery markets at the end of last year no doubt led to some advisers getting more pre-Christmas calls from their clients than usual – even the most steady-handed of clients will be wondering what the volatility means for their pension or investment pot.

Almost 40% of investors questioned by AJ Bell said they are expecting a stock market correction next year, with 50% of self-directed investors saying they have increased the cash levels in their portfolio in preparation for snapping up bargains in a market dip.

And in particular investors have been wary of UK stocks, with the research showing that almost a third have reduced their exposure to UK companies. Clearly the big B-word is the main worry, as the deadline for Brexit looms, with little clarity on the decision and a degree of political paralysis in the country.

However, one thing that could support UK stocks next year is the healthy dividends on offer. Based on current share prices the FTSE 100 is forecast to yield 4.9% next year, with the recent market selloffs boosting the forecast yields for 2019. Dividends paid out by the UK’s blue chip index are forecast to hit a new all-time high of £93.7bn next year.

For those in retirement, this looks like a juicy offer, particularly when you consider that the Bank of England’s Base Rate is 0.75% (and cash accounts are offering far lower than that) and the 1.23% yield on the benchmark UK 10-year Gilt.

But away from the headline figures, there are some worries. Average dividend cover is just 1.21 times for the 10 highest yielders, which is certainly lower than ideal. What’s more, the 10 biggest yielders make up 54% of the entire index’s expected payouts next year.

These figures are skewed by the presence of three housebuilders in the top 10, with Taylor Wimpey set to pay out 13.1%, Persimmon at 11.8% and Barratt Development at 9.6%. These stocks have seen their share prices hit amid scepticism that they can maintain current profitability – hence the high yields.

Earnings cover for overall FTSE 100 dividends is a more reassuring 1.79 times – marking a four-year high, although still below the comfort zone of 2 times, which hasn’t been seen since 2014.

While the top-line figures are encouraging, and certainly could boost the UK market next year, picking individual stocks to find this yield can be difficult and increases the risk of disappointment if a particular firm has to cut its dividend.

So we’ve unearthed the funds that pay out more than the average 4.9% that is forecast for the FTSE 100 and hence could be useful options in these choppy markets. Some are UK-focused and other hunt further afield for their income.

Six funds yielding 5% or more:

Unicorn UK Ethical Income

Yield: 5%

This fund aims to generate a return of 110% of the yield from the FTSE All-Share over a three-year period. Managed by Fraser Mackersie and Simon Moon, the fund invests in 50 investments, focused more on small and medium-sized companies.

Woodford Income Focus

Yield: 5.8%

Feted fund manager Neil Woodford has not had an outstanding year, but he did build his career on a stellar performance and has rebounded from periods where his style has been out of favour before. He is also very focused on delivering a dividend to investors. The fund is currently 97% invested in UK stocks, but has the ability to invest around the world in the future.

Artemis High Income

Yield: 5.9%

Launched more than 10 years ago, this fund has around 80% of assets in fixed income and the rest in stock markets, meaning manager Alex Ralph can make a call between which is most attractive. The fund has delivered annualised total return over the past three years of 4.5%.

TwentyFour Income

Yield: 6.2%

Launched in March 2013, this trust invests in a mix of European and UK asset-backed securities. It also focuses on floating-rate bonds, where the interest paid out increases as interest rate rises. It aims for a yield of 6% and is delivering just above this at the moment.

Janus Henderson Far East Income

Yield: 6.6%

Managed by Mike Kerley, this investment trust invests in the Asia-Pacific region. Dividends are rapidly growing in the region, and the fund offers investors a different source of income from UK-listed companies. In the year to 31 August 2018 the payout grew from 20.8p to 21.6p – an increase ahead of UK inflation, although its capital returns were not as impressive

Kames Property Income

Yield: 5.2%

This property fund shuns much of the London region and instead aims to invest in smaller commercial properties outside of the capital. The fund has delivered annualised total returns of 4.9% over the past three years, and this fund was one of the few to remain open in the Brexit aftermath in 2016.

Laura Suter is personal finance analyst at AJ Bell