Stubbornly low interest rates have made income tough to come by in recent years. With cash savings producing meagre returns, many yield-starved investors have increasingly turned to stock market funds in order to earn better returns.
UK equity income
Investing in income-generating stocks is a popular way to add yield to your portfolio and there are many UK equity income funds on offer for investors who don’t want to do a lot of analysis and pick individual stocks.
Equity income funds have a clear mandate — to create income for investors by investing in the stock market. The best income funds find a balance between the need to produce reliable income with a desire to protect and grow investor’s capital over time. But don’t just look at the popular funds as there are many high-yielding investment trusts trading at a discount to their net asset values (NAVs).
Less than the sum of its parts
The F&C UK High Income Trust (LSE: FHI) is one such investment trust. With a share price of 102.5p, the trust trades at a 10% discount to its NAV, meaning prospective investors can effectively purchase shares in the fund for less than the sum of its parts.
Philip Webster, the fund’s manager since March 2017, likes to pick wide-moat companies with a history of generating reliable earnings year after year. Defensive stocks with low cylicality dominate its top 10 holdings, with the likes of British American Tobacco (7.2%), GlaxoSmithKline (4.7%), Diageo (3.33%), Unilever (3.29%) and RELX (3.03%) among some of its biggest positions at the end of September.
The investment trust has a focus on large-cap companies as FTSE 100 stocks represent 56.7% of the value of its portfolio. FTSE 250 constituents account for another 24.9%, while non-index and overseas stocks are worth a further 6.4%.
With its market-beating dividend yield of 4.6%, this trust is a tempting income choice for the long run.
Investing in utility stocks is another popular choice for income investors seeking to beat low returns on savings. Utility companies have long been a go-to option for income investors. Why so? As they tend to earn steady revenues, they have historically paid reliable dividends to shareholders with relatively low price volatility and reduced risk.
In this space, the Premier Energy & Water Trust (LSE: PEW) is one fund I’m keeping an eye on. This fund invests in utility companies from around the world, with the aim to deliver a high income from its portfolio and to achieve long-term growth in the capital value of the portfolio.
It owns a mix of electricity, gas, water and waste companies, which gives it diversified exposure to multiple markets and helps to reduce the overall risk of the portfolio. Top holdings include Beijing Enterprises Holdings (5.9%), SSE (5.5%), Chinese water and waste management company China Everbright International (4.1%) and Brazilian water and waste company Cia de Saneamento do Parana (5%).
Today, the shares are trading at a discount to its NAV of 8%, with a dividend yield of 5.9%.
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Jack Tang has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.