Best place to get Income rather than growth from an ISA?

Ad_Astra

Hi MoneySavers

I have accumulated approx. £200k in a self-selected stocks and shares ISA that I am looking to use as part of my retirement plan. I do not have any need to draw down on the capital but I am looking at getting an income rather than growth going forward. As it is in an ISA I could get the income tax free which is appealing. I am happy to leave the capital invested and I am OK with a variable income. What kind of ISA should I consider transferring my stocks and shares ISA into to get the best income stream?

ColdIron

Ad_Astra said:

What kind of ISA should I consider transferring my stocks and shares ISA into to get the best income stream?

There are 4 kinds, or types, of ISA

• Cash ISAs.
• Stocks and shares ISAs.
• Innovative finance ISAs.
• Lifetime ISAs.

Your S&S ISA is probably the best kind to provide the best income stream as the others are either unsuitable or you are ineligible for. It's not the kind of ISA you should be looking at but the investments within that ISA

You might look at changing some or all of your current investments from growth oriented ones to income producing ones. You might look at taking any dividends or interest as income rather than reinvesting them

eskbanker

There are plenty of funds that are geared more towards income than growth, generally investing in high-yield organisations that pay substantial dividends, but many prefer to stick to the broader spectrum of businesses and drawing down from total return rather than natural yield, i.e. including the capital when necessary, on the basis that this can be more productive in the long run - in other words, buying into a fund that grows by, say, 6%pa will be a better bet than one that pays out 4%pa and only grows by 1%.  Of course, such figures aren't known in advance though....

Edit: inadvertently referred to 'natural yield' the wrong way round!

jimjames

There's no need to chanmge your ISA at all but you can switch the funds it is invested in. If you are only interested in income then a selection of the IT dividend heroes that have increased their dividends (ie income payments) for many years, some over 50 years, could be a place to start.

https://www.theaic.co.uk/income-finder/dividend-heroes

Ad_Astra

Thanks for the replies. 

I view my S&S ISA as a nice to have that can provide a bit of extra income. If it comes in I could spend it on a treat, if nothing comes in it is not going to cause me hardship. Within my S&S ISA there are currently several different share funds across different geos . In years that it grows I could take out the part it has grown by, but as there are several funds this could be a busy task. I was thinking of consolidating into one fund to make things a little easier and have the dividend or interest paid into my current account and leave the investment. 

Retirements books seem to suggest this is not a good strategy one calls it: "natural yield a totally bonkers retirement income strategy". However, as it is not my main income so does it make sense or is it "bonkers"? 

Say I put it all into an income based fund, I get X% dividend which can go up or down. I am OK with that. If the underlying stocks decrease in value am I current in that they would pay X pence per share not a percentage of the stock value? So if the stock price crashed and the companies continued at X pence per share then the income would remain the same? For sure it is unlikely that the dividend would remain the same but is my understanding correct? 

Cash ISA offers no growth potential if I take the interest so thinking of a high income fund within the ISA looks a good option. How would I research the best fund, e.g. low charges? Every one I look at shows a graph of the underlying fund performance but I haven't found any information on historical yield pay out. 

El_Torro

One option would be to invest in a multi asset fund or global tracker (depending on whether or not you want bonds in there). You could invest in an Accumulation fund and take the dividends. I wouldn't expect dividends of more than 1-2% in doing this but it's an option. Also when shares are doing well you can always sell some of the fund and not do this when shares are not doing so well. Since you don't actually need the money you can be flexible on how much you take out. 

Of course you can invest in a fund that is designed to return a high dividend return. I'll let others make suggestions on this since I don't use such funds. The downside is that the fund is unlikely to grow as fast as a global tracker in the long run. 

eskbanker

Ad_Astra said:

Retirements books seem to suggest this is not a good strategy one calls it: "natural yield a totally bonkers retirement income strategy". However, as it is not my main income so does it make sense or is it "bonkers"?

As with many aspects of financial planning, there's no right or wrong answer, so best to understand the underlying arguments for and against rather than being swayed by emotive wording in soundbites!

Ad_Astra said:

Say I put it all into an income based fund, I get X% dividend which can go up or down. I am OK with that. If the underlying stocks decrease in value am I current in that they would pay X pence per share not a percentage of the stock value? So if the stock price crashed and the companies continued at X pence per share then the income would remain the same? For sure it is unlikely that the dividend would remain the same but is my understanding correct?

Yes, dividend payments will generally be stable in absolute terms rather than as a percentage of share price.

Ad_Astra said:

How would I research the best fund, e.g. low charges? Every one I look at shows a graph of the underlying fund performance but I haven't found any information on historical yield pay out. 

Low charges aren't a particularly meaningful measure when comparing funds, except as a secondary filter after first evaluating which funds satisfy overall objectives, strategy, etc.  Most sites listing funds should include historical yield, whether that's individual platforms or independent sites such as Trustnet or Morningstar.

Another factor to consider is that of derisking before starting to access return from investments, i.e. building some protection against volatility and sequence of returns risk....

jimjames

Ad_Astra said:

Say I put it all into an income based fund, I get X% dividend which can go up or down. I am OK with that. If the underlying stocks decrease in value am I current in that they would pay X pence per share not a percentage of the stock value? So if the stock price crashed and the companies continued at X pence per share then the income would remain the same? For sure it is unlikely that the dividend would remain the same but is my understanding correct? 

Yes your understanding is correct but as per the link I posted earlier there are investment trusts that have increased their dividends year on year for 50 years regardless of what happened to their share prices during that year. ITs have the advantage that they can smooth out their income payments by holding some back each year, OIECS don't have that option and have to pay out all their income.

wmb194

You can play with the filters on Trustnet. There are lots of different options, dividend paying OEICs, ETFs and ITs and with different weights to equities, bonds and geographies.

If you use a broker like iWeb, ultimately owned by Lloyds Bank, you'll pay no ongoing account fees and it gives the option for dividends and interest to be paid away to your current account automatically so it could literally be set and forget.

https://www.trustnet.com/fund/price-performance/o/ia-unit-trusts-and-oeics?norisk=true&PageSize=25

Linton

Ad_Astra said:

Thanks for the replies. 

I view my S&S ISA as a nice to have that can provide a bit of extra income. If it comes in I could spend it on a treat, if nothing comes in it is not going to cause me hardship. Within my S&S ISA there are currently several different share funds across different geos . In years that it grows I could take out the part it has grown by, but as there are several funds this could be a busy task. I was thinking of consolidating into one fund to make things a little easier and have the dividend or interest paid into my current account and leave the investment. 

Retirements books seem to suggest this is not a good strategy one calls it: "natural yield a totally bonkers retirement income strategy". However, as it is not my main income so does it make sense or is it "bonkers"? 

Say I put it all into an income based fund, I get X% dividend which can go up or down. I am OK with that. If the underlying stocks decrease in value am I current in that they would pay X pence per share not a percentage of the stock value? So if the stock price crashed and the companies continued at X pence per share then the income would remain the same? For sure it is unlikely that the dividend would remain the same but is my understanding correct? 

Cash ISA offers no growth potential if I take the interest so thinking of a high income fund within the ISA looks a good option. How would I research the best fund, e.g. low charges? Every one I look at shows a graph of the underlying fund performance but I haven't found any information on historical yield pay out. 

I use dividend/interest from an S&S ISA portfolio for about 25% of my day-to-day income, the rest coming from State Penion and annuities.  

So to comment on your specific points , in my view...

1) Using dividend/interest income is not bonkers.  In the right circumstances and used in the right way it can be a very useful strategy.

2) With income funds you can largely separate the price from the income.  Generally fund income is a lot less volatile than the capital value and is fairly stable in  £ terms in the medium term.  Variations in % yield tend to be more a function of changes in price than income.  In fact if market interest rates change income fund values will often change so that the fund yield remains comparable.

3) Yes, if a share price crashes, unless the company really is in serious trouble, you would expect the dividends to continue regardless at least in the medium term.  Shareholders and the market more generally dont like dividend cuts. The same is also true of bond funds, though their interest in £ terms is more strongly protected.

4) I would certainly not recommend putting all your money into income funds.  You need growth oriented funds as well to match inflation in the medium term, to patch any holes that appear in your income portfolio., and to support large one-off expences.  Also you need to be thinking about diversification since dividend funds tend to be concentrated in particular sectors.

5) Choice of income fund:
 I believe low charges is the last thing you should look at once everything else has been considered. Yes they are a factor but are less important than other factors.  These other factors include:

a)The % yield at which you buy is important since that defines the income in £s you would expect in the medium term.  You should be looking at funds with a significantly higher current yield than the market as a whole but be careful.  The published yield is calculated on the past year's dividend divided by the curent price.  SO
o if the price has collapsed the % Yield ciould be artifically higth.


b) How the fund fits in with your other investments to provide high diversification within your portfolio as a whole.

c) Diversification of income - You should ensure that you are getting your income from as many different sources as possible. So yes to bonds of a range of types, yes to as many geographies you can find that offer funds with high income, yes to less mainstream areas such as infrastructure.

ColdIron

Ad_Astra said:

However, as it is not my main income so does it make sense or is it "bonkers"?

It isn't bonkers, it's what I do for a proportion of my investments, I have separate growth oriented portfolios. A total return approach with periodic sales may produce a better overall return over time but it comes with a (non financial) cost. I want a nice retirement and don't want to be making decisions about when to sell and checking prices all the time. You may find that occasionally you are selling for less than you paid and maybe not selling at all or delaying as a result. This is stress I can do without. With natural yield I don't have to lift a finger, the money keeps rolling in and I can get on with my life

It doesn't have to be an all or nothing approach, you can employ a number of strategies and most important of all, those that best suit your circumstances and objectives

Say I put it all into an income based fund, I get X% dividend which can go up or down. I am OK with that. If the underlying stocks decrease in value am I current in that they would pay X pence per share not a percentage of the stock value?

Yes, dividends are expressed in pounds and pence per share. Yield, expressed as a percentage, is just the dividend divided by the current share price. If the share price halves the yield doubles and vice versa but the payment in £/p is the same, for a while anyway.

So if the stock price crashed and the companies continued at X pence per share then the income would remain the same? For sure it is unlikely that the dividend would remain the same but is my understanding correct? 

Managers cannot control the share price but they do control the dividend and can keep it up to reward their investors for quite a while but obviously not forever. They will hope for an improvement in the share price which is likely if you haven't bought a lemon. Dividends are much more resilient that share prices. Yield is just a snapshot and can vary, wildly in some cases

Cash ISA offers no growth potential if I take the interest so thinking of a high income fund within the ISA looks a good option

High yield funds can suffer the same problems as cash. There is a very real prospect of capital depreciation but there is no reason why you should leap from one end of the scale to the other, maybe find a middle ground. A lower yield fund (2% to 3% or 4%) or split your funds between growth and income. There are many ways to skin that particular cat

How would I research the best fund, e.g. low charges? Every one I look at shows a graph of the underlying fund performance but I haven't found any information on historical yield pay out.

You could start with the link above. Historic dividends (in pounds and pence) are widely available