One of the main benefits of investing in an Individual Savings Account (ISA) is that all of the income is tax-free. This means that they can provide a useful source of cash to supplement a salary or pension, especially now that investment yields have risen to such attractive levels.
By combining funds that invest in different asset classes it is possible to build a simple yet diversified portfolio that pays a reliable and growing income. A good starting point would be the Select 50, which includes a number of suitable options, with a mixture of the four highlighted below generating a distribution every month of the year.
When investing for income it is important to choose the income share class, otherwise the cash will automatically get rolled up in the capital value of your holding. If you have a Fidelity Stocks & Shares ISA you can then elect to have the distributions paid out directly to you, reinvested back into the investment they came from or held as cash in your account.
M&G Corporate Bond Fund
Most income investors will normally allocate part of their portfolio to fixed interest, which generally offers a predictable yield at a lower level of volatility than equites. A good example is the M&G Corporate Bond Fund, which invests at least 70% of its assets in investment grade bonds issued by companies, but can also hold government and high yield debt.
It benefits from an experienced manager and is supported by a strong team of analysts who are responsible for assessing the creditworthiness of the different issuers. The fund mostly invests in lower risk companies and hedges any foreign currency exposure back to sterling, but would still be affected by changes in inflation and interest rate expectations, as well as other such factors.
Over the last five years, M&G Corporate Bond generated a small annualised loss of 0.12% due to the sharp increase in interest rates. Please remember past performance is not a reliable indicator of future returns. The I-Income share class now offers an attractive historic distribution yield of 4.49% with quarterly distributions in January, April, July and October. Please note this yield is not guaranteed.1
Fidelity Global Dividend Fund
Dividend paying shares are another good source of income, which tend to have a lower starting yield than fixed interest, but offer the prospect of rising distributions and capital growth. If you are looking for this type of exposure you might want to consider Fidelity Global Dividend Fund, which is one of Tom Stevenson’s fund picks for 2025.
Longstanding manager Dan Roberts has a conservative approach that focuses on stocks with predictable, consistent cash flows and simple, understandable business models with little or no debt on their balance sheets. His strong valuation discipline and high conviction approach has resulted in a low turnover portfolio with around half the volatility of the MSCI All Country World benchmark.
Fidelity Global Dividend has a lower level of risk than a typical equity fund, yet over the last 5 years it generated an impressive, annualised return of 8.7%. Please remember past performance is not a reliable indicator of future returns. The W-Income share class has a distribution yield of 4.08%, with quarterly distributions in March, June, September and December. Please note this yield is not guaranteed.2
International Public Partnerships
A less mainstream option is infrastructure, which can be accessed via a specialist investment trust such as International Public Partnerships Ltd (INPP), another of Tom Stevenson’s fund picks for 2025. It owns essential, low risk assets such as schools and hospitals, transport and renewables that tend to be held in partnership with the government and subject to long-term contractual arrangements.
INPP is managed by a highly experienced and well-resourced team that focus entirely on this area, with the aim being to provide stable, long-term, inflation-linked returns, based on growing dividends and the potential for capital appreciation. The underlying cash flows tend to be highly predictable and this has enabled the distributions to be increased every year since the Initial Public Offering (IPO) in 2006.3
Like many other income-paying investment trusts, International Public Partnerships has suffered as a result of the big increase in interest rates with the shares currently trading at a wide discount to net asset value (NAV) of 23%. Over the last 5 years it has generated an annualised loss of 2.65%, but currently offers a prospective yield of 7% with quarterly distributions from September onwards. One of its closest peers, BBGI Infrastructure, recently attracted a takeover bid.
Ninety One Diversified Income
If you don’t want to combine different asset classes yourself you might prefer an option like the Ninety One Diversified Income Fund, which offers a one-stop-shop where the manager sorts out the allocation for you. It invests in a mixture of bonds, dividend-paying shares, infrastructure and property to deliver a reliable income with the opportunity for capital growth.
The fund aims to keep the risk to less than 50% of that of the UK stock market as measured by the FTSE All-Share Index and over the 5 years to the end of December it achieved an annualised volatility of just 5.6%4. Managers John Stopford and Jason Borbora-Sheen have a long track record running this strategy and have successfully been able to limit capital losses while providing a steady yet growing income.
Over the last five years, Ninety One Diversified Income generated an annualised return of 2.1%. The J-Income share class has a distribution yield of 5.06% with monthly distributions. Please note this yield is not guaranteed.
Source:
1,2 Fidelity International, 31 December 2024
3 International Public Partnerships, factsheet, data as at 30 June 2024
4 Ninety One, factsheet as at 31 December 2024
| (%) As at 31 Dec | 2019-2020 | 2020-2021 | 2021-2022 | 2022-2023 | 2023-2024 |
|---|---|---|---|---|---|
| M&G Corporate Bond | 6.0 | -1.8 | -15.3 | 10.6 | 2.0 |
| Fidelity Global Dividend | 6.0 | 12.8 | 0.2 | 9.5 | 13.5 |
| International Public Partnerships | 6.9 | 4.4 | -6.7 | -4.0 | -5.8 |
| Ninety One Diversified Income | 4.7 | 1.5 | -5.4 | 6.1 | 4.0 |
Past performance is not a reliable indicator of future returns