Best Income Investment Funds UK for 2024

Income investment funds have become very popular among investors as the income from traditional savings accounts remains at record lows. While traditionally the best investment income funds have been the focus of retirees, many investors are now seeing the benefits of investing in them at a much earlier stage in their life. 

In this ‘Best Income Funds UK’ guide, we go through what the best investment funds for income are right now, the difference between income and accumulation funds and how you can start investing in them with zero fees! 

Best Income Investment Funds UK List 

Below is a quick list of the top 10 best income funds UK. We go through each of the funds in more detail in the next section. 

1. City of London Investment Trust – 55 Year History in Raising Dividend Payouts
2. Alliance Trust PLC – 54 Year History in Delivering Income to Investors 
3. Scottish Mortgage Investment Trust – Top Rated Global Diversified Income Funds
4. Vanguard Real Estate ETF – Best Vanguard Fund for High Income 
5. JPMorgan Ultra-Short Income ETF – Best Income Fund UK Alternative 

Best Income Investment Funds to Invest in UK

If you’re interested in learning more about the best income funds UK to invest in then keep on reading as we discuss the list above in more detail. 

1. City of London Investment Trust – Overall Best Income Fund for Dividends

The City of London Investment Trust has one of the world’s most impressive track records of raising its dividend payout every year within its 55-year history. Dividend payouts are a key component of the best income funds UK. A dividend is the distribution of profits to eligible shareholders and is a form of income. 

The aim of the City of London Investment Trust is to provide long-term growth in income and capital by mainly investing in equities listed on the London Stock Exchange. According to the trust’s factsheet, its top ten holdings include UK income favourites such as Diageo PLC, British American Tobacco PLC, RELX PLC, Tesco PLC, Unilever PLC, Phoenix Group Holdings PLC, GlaxoSmithKline PLC, National Grid PLC, AstraZeneca PLC and BAE Systems PLC. 

The fund has a total holding of 81 stocks. Most of the trust’s holdings are in large cap UK stocks but there are some small cap stocks (smaller companies) and US-listed stocks within it. The trust sits within the UK Equity Income sector and has a high yield of 4.71%. Dividends are paid out quarterly.

The City of London Income Trust has a Morningstar rating of three stars. While the price of the trust declined during the coronavirus pandemic – as with stock markets around the world – it has already clawed most of the decline back. 

However, there is still room for the trust to grow as it is only a few percentage points away from reaching the price levels it was trading before the pandemic started. The next target is likely to be the all-time high around GBX 449.00. 

2. Alliance Trust PLC – 54 Year History in Delivering Income to Investors

Established in 1888 and headquartered in Dundee, Scotland, the Alliance Trust PLC is listed on the London Stock Exchange and is also a constituent of the FTSE 250 Index. The trust has an aim to deliver real, long term returns through capital growth and a rising dividend. It has one of the best track records in delivering dividend income to its investors. 

The Alliance Trust PLC has risen its dividend every since 1966 and is managed by Willis Towers Watson. This investment manager manages more than $148.6 billion for institutional clients and advises on assets of more than $3.4 trillion. 

The Willis Towers Watson team tasks each of its individual stock pickers to invest in 20 stocks in which they have the highest level of conviction. The aim is to provide a diversified portfolio across industries and countries but with a more active approach. 

Currently, Alliance Trust PLC has an annual 1.7% net dividend yield but is also trading at a 4.5% discount. The trust invests in countries all around the world with 59.8% allocated towards North America or US stocks, 10.5% to the UK, 14.3% in European stocks and 13.0% in Asia and Emerging Markets. 

The highest concentration of its holdings are in the information technology and communication sector. However, the trust will invest in stocks in all sectors such as financials, healthcare stocks, energy, etc. Around 75% of the trust is actively managed which the investment manager believes provides a more diversified return compared to standard benchmark indexes. 

The top ten holdings in the trust include Alphabet, Microsoft, Visa, Amazon, Salesforce.com, Facebook (now Meta), Charter Communications, KKR, Nvidia and Taiwan Semiconductor Manufacturing. 

The trust reached a record high in November 2021 but has since pulled back to lower price levels providing an interesting opportunity for investors. 

3. Scottish Mortgage Investment Trust – Top Rated Global Diversified Income Funds

The Scottish Mortgage Investment Trust was launched in 1909 and is considered to be investment manager Baillie Gifford’s flagship investment trust. Over the last ten years, the investment trust’s past performance has risen 1,147.2%, massively beating its benchmark index the FTSE All-Share World Index (GBP) which rose 270.6% over the same period.  

The aim of the trust is to add value over five year time frames by investing in global equities. The £15 billion investment trust, which is also a constituent of the FTSE 100 Index, is heavily focused on technology companies with 39 holdings in the portfolio. The top ten holdings of the investment trust include Moderna, ASML, Illumina, Tesla, Tencent, Nvidia, Meituan, Delivery Hero, NIO and Kering. 

The investment trust has a five star rating on Morningstar and is one of the most popular trusts for income investors in the UK for their ISA or SIPP portfolios – largely due to the exceptional track record and total return. However, the recent global stock market decline at the beginning of 2022 has also affected the investment trust which is down more than 30% from its record high of GBX 1568.50p in November 2021. 

However, the recent decline means the Scottish Mortgage Investment Trust is trading at a 7% discount to the value of its net assets. This is due to the fact, the trust has mainly invested in growth companies, or growth stocks, whereas the market is now currently focused on value companies or value stocks. 

But, within the impressive long term track record of the investment trust, it also experienced significant declines during the dot com bubble and the financial crisis. In fact, the trust fell 50% during the dot com bubble but has still managed one of the best long term track records in the business. 

The fact the management team and fund manager have been here before and know how to weather changes in the market is a good sign. The trust also has some unlisted holdings and is a great way to capitalise on these companies as well such as the lithium-ion battery maker Northvolt and SpaceX. 

4. Vanguard Real Estate ETF – Best Vanguard Fund for High Income 

The Vanguard Real Estate ETF is considered to be one of the best income funds UK from investment manager Vanguard. The aim of the fund is to provide a high level of income and moderate long term capital growth by tracking the performance of the MSCI US Investable Market Real Estate 25/50 Index. 

Essentially, the Vanguard Real Estate ETF invests in publicly traded equity REITs (real estate investment trusts) and other real estate related investments. REITs are companies that purchase commercial buildings such as offices and hotels. This then helps the fund to achieve high levels of income. 

Currently, the exchange traded fund has a dividend yield of 2.83% with a low net expense ratio of just 0.12%. It also holds 168 stocks with the highest concentration in specialized REITs, followed by residential REITs and then industrial REITs. 

The top ten holdings in the fund include the Vanguard Real Estate II Index Fund, American Tower Corp, Prologis Inc, Crown Castle International Corp, Equinix, Public Storage, Simon Property Group, Digital Realty Trust, SBA Communications and Realty Income Corp.  

When building a portfolio of the best income funds UK, diversification is key. Being too heavily exposed to all UK equity income funds means all your funds are highly correlated. This is great in a bullish market but will open you to bigger losses in a bearish market. 

The US real estate market is a great sector to diversify your portfolio as it is likely to be uncorrelated to what is happening with UK companies. The investment manager, Vanguard, also believes in diversification which is why it offers a variety of different ETFs and Vanguard funds covering different industries, sectors and countries providing access to global income funds. 

While most global stock market indices declined at the start of 2022, the Vanguard Real Estate ETF performed well and actually recorded new all-time highs in January.

5. JPMorgan Ultra-Short Income ETF – Best Income Fund UK Alternative

The JPMorgan Ultra-Short Income ETF is an alternative to the best incomes funds UK. The focus of the fund is to provide current income but with very low volatility by focusing on risk management. It does this by investing in fixed income products such as government and corporate bonds. 

The fund itself captures 23% of the US Aggregate Bond Index’s yield but with only 12% of the invested duration. Historically, the fund has provided a 29 bps yield advantage over money market funds. The fund is used by larger institutions to hedge downside risk and reduce volatility in their portfolios. 

Essentially, instead of keeping capital in cash during the downturns in the market, investors use this fund to get a slightly better rate of return but with very low volatility. The fund has 682 holdings with fixed income products and bonds such as Royal Bank fo Canada Zero 10/2, First Abu Dhabi Zero 06/2, BNP Paribas 3.5% 03/23 and others. 

The first four best income funds UK discussed not only offer income opportunities but also growth opportunities. This means you can collect good dividend payouts and potentially have the benefit of a rising share or fund price you can sell for a profit in the future. The JPMorgan Ultra-Short Income ETF is designed to hedge against downside risk in the market instead of being in cash which at the rate of current inflation and low interest rates provides a negative yield. 

What are Income Investment Funds?

Income investment funds are funds created by investment managers that prioritise buying assets that provide income rather than capital growth or appreciation. Income funds will typically purchase the best dividend stocks that pay a high dividends or bonds that provide a fixed coupon or interest payment. 

The assets purchased by the investment manager are typically packaged up into a fund or trust which is then listed on a public stock exchange. This allows investors to invest in income funds or trusts through just one investment just like buying stocks and shares. 

Some of the most well-known asset managers that provide income funds include Artemis Income, Invesco, Threadneedle UK Equity Income, Fidelity, Schroder, Man GLG, Vanguard, Jupiter, Henderson and many others. 

Accumulation vs Income Funds

Mutual funds and exchange traded funds often fall within two fund share classes: ‘income’ and ‘accumulation.’ What is the difference? 

Income funds will typically pass on any income they receive from the underlying assets held in the fund to the investor. The mutual fund or ETF will process these streams of income (dividends from stocks or interest payment from bonds) for its investors. It will then distribute these to investors either monthly, quarterly or annually. 

Accumulation funds will typically reinvest any income they receive and buy more shares or bonds. The aim of an accumulation fund is to provide capital growth to the end investor by using compound growth – reinvest income to buy, or accumulate more holdings.  

Why Invest in Income Investment Funds?

Trying to find the best income funds UK has become much more popular in recent months. This is because the recent stock market crash at the beginning of 2022 was due to fears of economic growth having peaked. 

More investors are now focused on finding income-producing assets rather than growth. Being able to adapt and invest properly during the right market conditions is a key ingredient to building a good long term portfolio. 

Most financial advisors will also place more funds of retirees into income funds. This is because during retirement you are more focused on having an income rather than capital growth. 

Fortunately, there are some investments – as highlighted above – where you can achieve a good income through dividend payouts and achieve long term capital growth. This provides a compelling reason to start investing in the best income funds UK.

Conclusion

While investing in income investment funds has mainly been the focus of those in retirement seeking an income, a peak in global economic growth has forced investors to also seek out income-producing investments.  

Frequently Asked Questions on the Best Income Funds UK