It has been a painful start to the year for investors. Global markets have lost 12pc in the past six months. Yet savers must make double-digit returns if they want to prevent inflation, which is forecast to hit 11pc this year, eroding the value of their money.
Relying on share price rises may not be enough – instead, investors should turn to dividends, experts have advised.
Emma Mogford, of the asset manager Premier Miton, said: “At the moment, the London stock market yields 3.5pc. But if you look for funds that specialise in income-paying stocks, you could get a yield as high as 4pc. If you hope to match inflation, dividends have already achieved almost half of that for you. Suddenly, you are less reliant on share price rises.”
Yields from investments have historically been comfortably ahead of inflation. The most popular dividend-focused investment trust sectors, such as UK Equity and Bond Income, have delivered a yield of more than 4pc since 2017 and as much as 5.7pc in the first quarter of this year, according to the Association of Investment Companies.
Darius McDermott, of the fund shop Chelsea Financial Services, said that over the past century, reinvested dividends had been the main driver of investors’ returns.
“Dividends have made up around two-thirds of total returns over the past 100 years,” he said. “It’s true that the past decade has been driven by exciting growth investments in areas such as technology, but the bigger picture tells us that old-fashioned dividends are equally important.”
Ms Mogford added that the London stock market looked particularly attractive for income investors. “We like industries such as housing and infrastructure for income,” she said. “For example, the housebuilder Barratt Developments looks very appealing. We think it will benefit from the Government’s levelling-up agenda. It pays a dividend yield of 7.2pc.” She also highlighted Ibstock, a brickmaker, which yields 4.4pc.
Andrew Hardy, of the investment manager Momentum, agreed that infrastructure was an attractive area for investors who sought high but reliable dividends. He highlighted the Gore Street Energy Storage Fund, which invests in renewable-energy infrastructure and yields 6.6pc.
“This investment trust owns grid-scale assets for energy storage, which is a key part of the infrastructure required to make renewable investments work over the long term,” he said. “We also like Greencoat UK Wind, which has been a key beneficiary of rising power prices.” The trust, which owns wind farms across Britain, has returned 18pc over the past year and yields 4.9pc.
Mr Hardy also highlighted Ediston Property Investment Company, which invests in retail warehouses, offices and industrial property and yields 5.8pc.
However, Nick Purves, who co-manages the £705m Temple Bar Investment Trust, warned that stocks that paid reliable dividends often came at a higher price.
“More often than not, an investor will pay a higher premium for that level of protection,” he said. Instead, Mr Purves highlighted stocks that he believed were trading cheaply relative to their underlying value, such as the miner Anglo American. It yields 6.9pc.
However, investors who buy income-paying stocks need to beware of “value traps”. A high dividend yield can be a result of a low share price, which could indicate that the company is out of favour with the wider market – often with good reason.
For income investors who prefer to entrust their money to fund managers, rather than pick individual stocks, Mr McDermott highlighted the £464m Janus Henderson UK Responsible Income Fund. It counts the pharmaceutical giant AstraZeneca among its top 10 holdings and yields 4.1pc.
But Mr McDermott warned against depending too heavily on the London stock market for dividends. “If you don’t look beyond Britain, your portfolio could end up with its income too heavily concentrated in just a few of our biggest sectors, such as oil and gas,” he said.
For those who want more international exposure, he highlighted the £2.4bn M&G Global Dividend Fund. It has a lower yield of 2.3pc, but counts American giants such as Microsoft and Bristol Myers Squibb among its top 10 holdings.