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Dividend income funds grow in popularity with investors amid market volatility

Published: 10:54 15 Jun 2022 EDT

NextEnergy Solar Fund Ltd -
Renewable energy and infrastructure were among the popular themes

Retail investors have been increasingly looking for investment trusts that offer dividend income, as protection against market volatility and rampant inflation.

The past three months have seen a "notable increase" in customers looking for dividend strategies compared to the three preceding months, the Interactive Investor (ii) platform said.

READ: Inflation-linked bonds are an untested market with high but unproven promise  

These have included infrastructure and renewable energy funds, which can have a level of built-in inflation protection, but also trusts with broader aims.

It echoes the most-popular funds data in previous months from rival platform AJ Bell, which has included several trusts offering means for investors to diversify their portfolio and gain some inflation protection.

The five trusts climbing most up the ii rankings in the past three months are: NextEnergy Solar Fund Ltd (LSE:NESF), The Renewables Infrastructure Group Limited (LSE:TRIG), Murray International Trust plc (LSE:MYI), Tritax Big Box REIT PLC (LSE:BBOX).

Their respective yields are 6.7%, 5%, 4.4%, 3.8% and 3.6%.

In terms of open-ended funds paying income, climbing up the rankings are FTF ClearBridge Global Infrastructure Income, which yields 3.9%; Fidelity Global Dividend, yielding 3.5%; BlackRock Natural Resources Growth & Income, yielding 2.9%; and JPM Natural Resources, yielding 2.7%.

At AJ Bell, the most bought trusts over the past month include capital protection specialists Capital Gearing Trust PLC (LSE:CGT)Ruffer Investment Company Ltd (LSE:RICA) and RIT Capital Partners (LSE:RCP), along with infrastructure in the form of Warehouse REIT PLC (AIM:WHR), renewables in the form of Gresham House Energy Storage Fund PLC (LSE:GRID) and City of London too (several of which were also popular in ISA season and into April). 

READ: Buy 'dividend aristocrats' for highest investment returns, say analysts

In the most up-to-date industry data, global equity income was the bestselling fund sector, according to the Investment Association, with £678mln invested in what was the fifth consecutive month of inflows for the sector, while on the other hand the UK equity income sector has seen outflows for 12 consecutive months. 

With these figures showing investors preference to go global and leave UK equity income funds out in the cold, Kyle Caldwell, ii's collectives specialist, said, “investors could be missing a trick" as the median yield for the UK sector is 3.8% compared to 2.4% for global equity income funds.

Infrastructure and renewable energy funds

Infrastructure has been popular with investors as it offers protection against rising prices, due to its exposure to government-backed and inflation-adjusted income, which has fuelled increased demand for FTF ClearBridge Global Infrastructure Income and other renewables trusts.

Renewables Infrastructure Group and NextEnergy Solar Fund have, Caldwell said, "naturally" been benefiting from higher power prices as of late.

“Over the past year, the duo have delivered returns of 11% and 21.3%. Renewables Infrastructure Company, which has a longer track record, is trading on a high premium of 15.2% versus a small discount of 1.4% for NextEnergy Solar Fund.”

The other alternative asset trust that has seen higher demand recently is Tritax Big Box, which specialises in UK logistic assets, but has seen its share price dip since late April on the back of Amazon saying it was scaling back investment in its delivery network.

“Investors, however, have been at least attempting to buy low in the belief the warehouse success story of the pandemic will continue, shrugging off the prosect of slower growth for the sector, which would negatively impact rents and therefore income," said Caldwell. 

As for Murray International and Fidelity Global Dividend, the former has a bias towards Asia and the emerging markets, while the latter aims to deliver good long-term total returns with lower volatility than stock markets, mainly sticking to developed markets.

However the top of the list for income funds over the past three months is City of London Investment Trust (LSE:CTY), which has increased its dividend for 55 consecutive years and is one of the AIC's dividend heroes.

It was the third most-bought trust from the start of March to the end of May, and in the prior three months it was the fourth most-bought trust. 

For funds, the passively-managed Vanguard UK Equity Income fund tops the income popularity stakes, and yields 5.1%.

 

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