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How to choose reliable investment funds for income

We find the most reliable income-paying funds

Investments can provide income as well as returns from capital growth 

With savings rates at all-time lows and inflation back on the increase, it could be time to consider the stock market.  

Deciding to start investing is just the first step – you then need to decide where to invest. There are literally thousands of investment funds available and roughly half of them pay income out in the form of dividends or interest payments.

So, how to choose? In the October issue of Which? Money magazine, we cut down a list of more than 7,000 funds to create a shortlist of the most historically reliable and generous income-paying funds.

Here, we explain how we did it – and reveal some of the funds that made the cut. 

  • Our full investigation appears in the October issue of Which? Money magazine. If you’d like to read our latest investigations and expert guidance on insurance, savings, investments, pensions, tax and more, try Which? Money for two months for £1.

Our hunt for income

There are three types of assets that people generally turn to for income: bonds, equities and property. 

Bonds are issued by the government or private companies to raise money. The issuer promises that if you give them a certain amount of money now, they’ll give it back to you at a determined time and in the meantime pay you regular interest at fixed dates.

With equities, things are a bit different. Many listed companies distribute some of their profits to shareholders in the form of dividends. They don’t make as ironclad a promise as you get from a bond – company profits can change and the amount paid out as dividends can fluctuate. 

When investing in property, returns come from a combination of the property’s increased value and the rental income.

Rather than investing in individual assets, many people will invest in funds – a bundle of assets that are picked by a fund manager. 

In order to cut down our list of more than 7,000 funds into a more approachable shortlist of reliable income-paying funds, we sliced away the following:

  • institutional funds
  • funds with less than £100 million invested
  • any fund that hadn’t provided fresh data this year
  • accumulation funds
  • funds with fewer than 15 years of data available
  • those with average income yields of less than 3.5%
  • those with a standard deviation of more than 0.85%.

We were left with a shortlist of 18 funds, three of which we reveal below. The full list appears in the October issue of Which? Money.  

Reliable funds for income
Fund Where the fund exists Average payouta Standard deviationb Average income per £10,000 invested Five-year capital growthc 10-year capital growth 20-year capital growth Notes
Artemis Income UK equities 3.9% 0.82 £389 27% 22% n/a Holding almost £6.5 billion in investor money, this is one of the largest equity funds in the UK
Henderson Preference & Bond Corporate Bonds 5.3% 0.72 £533 3% -13% 12% This fund paid the highest average income over 20 years – but note the lacklustre capital growth
Invesco Perpetual High Income UK equities 3.5% 0.48 £349 41% 46% 312% This fund is the steadiest Eddie of the bunch, with income payments varying the least over 20 years

Table notes
This table shows three of the funds that we selected after applying strict criteria regarding amount and consistency of income payouts. We suggest treating this list as a starting point for further research, not as an exhaustive list of good options and not as a recommendation to invest in these particular funds. aHow much you would have been paid in dividends or interest, represented as a percentage of the amount invested. bStandard deviation is a measure of how far individual data points stray from their own average, and is therefore a good measure of variability for a fund’s yield.cThe appreciation in the value of the assets within the fund, expressed as a percentage.

Be aware of investment risk

Although these funds have provided steady income over the past 15-20 years, it’s impossible to know what the future holds or how any investment might perform in the coming decades. 

Investments are inherently risky – share prices rise and fall, dividend payouts fluctuate. Make sure you have enough guaranteed income to live off before investing. Also, avoid putting all your investment eggs in one fund basket. Holding five to 10 funds is a good place to start, so if some underperform you’ll be protected.

Plan in advance how much money you need to make from your investments. Look at other sources of income – property, employment, pensions – and think about how much more you require. This will help you decide on the funds into which you might put your money. The less income you need, the less risk you will have to take. 

If you’re interested in buying funds, you can do so through a fund supermarket. Our guide to choosing the best fund supermarket has all the information you need.

Tips for picking an income fund:

Here are our top three tips for picking funds that provide a reliable income. 

Decide if you want accumulation or income units 

Accumulation units will take the dividends and reinvest them into the fund. This coupled with compounding is one of the best ways to grow your capital. Income units will pay out dividend revenue, which might be more appropriate if you’re looking for ongoing income.

Don’t look at dividend yield in isolation 

Dividend yield is a measure of how much money you’d make in dividends if you’d invested a certain amount, so it’s a helpful statistic. However, it’s also a function of share price – if the share price drops but dividend payouts remain level, the dividend yield will rise. Sometimes companies will pay out high dividends to attract otherwise reluctant investors.

Be prepared for irregularities

Things change, and even a fund with a low standard deviation could see its dividends rise or fall – as well as share prices. Don’t invest more than you can afford to lose and try to avoid relying on investment income for the basic necessities.

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