Posted on January 27, 2015 in Global Investing

By Jackie Cameron

Are you looking for regular income in a hard currency? London-listed investment companies are being aggressively promoted as an option for investors in search of higher yields than they could receive from fixed interest assets.2C100 /%

The Association of Investment Companies (AIC), an industry organisation, has been highlighting to UK investors the benefits of using these vehicles.

UK base rates are just above zero, which in turn means that cash is highly unattractive for savers. There has been a big increase in the number of investment companies offering quarterly dividends in order to tap into demand for investments that produce a steady income stream.

There are now 82 public investment companies paying a quarterly dividend to their investors, says the AIC.“This has been a growing trend in recent years, illustrating investors’ appetite for regular income in a low interest rate world,” it points out.

In addition, some companies are moving to monthly payments. The AIC notes that only one investment company, F&C Commercial Property. was paying a monthly dividend in early 2014.

As the name suggests, this company invests in UK commercial property. It has a dividend yield of about 4%.

There are now at least four London-listed investment companies paying monthly dividends, says the industry body. These include:

• Foresight Solar Fund. a renewable energy specialist with a dividend yield of about 6%;
• TwentyFour Select Monthly Income. which also has a dividend yield of about 6%. This company invests in a diversified portfolio of credit securities;
• Fair Oaks Income. which has a dividend yield of over 8%. It is a sector specialist in debt.

Investment companies: what they are

Investment companies are similar to unit trust-type funds in that they use your money to invest in a basket of assets, which can include other shares, funds, property and cash. Also like unit trusts, an investment company is managed by an investment expert.

You can buy the shares of investment companies through a stock broker or you can access these equities through a savings scheme.

They differ from unit trusts in a number of ways. For example, investment companies are closed-ended, which means they don’t create new units (or shares) whenever someone wants to invest in them – as is the case with unit trusts, which are open-ended. Investment companies have a fixed number of shares that are traded like any other listed company.

Performance differs between investment companies and unit trust funds. WhatInvestment points to research showing that investment companies tend to perform best over longer periods of five to 10 years, while they are less likely to beat unit trusts over shorter periods.

“They also offer investors a bumpier investment journey, with more exaggerated ups and downs in their share prices. For investors fond of the quiet life, unit trusts are attractive because they are less volatile,” says WhatInvestment.co.uk .

Some of the reasons for the different experience of returns include that investment companies can buy less liquid investments and can accrue reserves. Unit trust managers, on the other, hand must make sure that assets can be easily sold if investors decide to exit a fund at short notice.

WhatInvestment also highlights that: many investment companies use gearing, or borrow money to buy assets; and unit trusts and investment companies are similar in terms of costs.

Choosing an investment company

There are more than 400 investment companies listed on the London Stock Exchange, says the AIC. So, how do you narrow your options?

Don’t just buy a stock because it pays regular dividends, says Shares. Research each company to thoroughly understand its strategy, financial health and opportunities, advises the weekly magazine for stock market investors.

The AIC offers some handy tips for investors who are sifting through investment companies for a stock to buy.  These include:

• Asking yourself what you want from your investment. “Do you want a regular income or are you putting money away for the long term so it can grow or do you need both income and growth? There are investment companies designed for each option.”
• Thinking about whether you want to invest in a specific sector. “You can pick one that will put your money in a specific part of the world or type of company.”
• Deciding how much risk you are prepared to take. “Roughly speaking, the level of risk you might accept depends on how long you can afford to tie up your money and whether you can afford to lose any of it. If youve got time on your side, you might be comfortable with riskier investments.”
• Investigating to see whether an investment trust is trading at a price that is higher or lower than its Net Asset Value (NAV). “An investment company trading at a discount  can be a buying opportunity. However, you shouldn’t assume that buying at a discount is automatically a good thing. The price of investment company shares depends on a whole range of things, including the sentiment towards the investment company, its investment strategy and the type of investments it holds. There may be a good reason why it is trading at a discount.”

The AIC has made it easy for investors to do their homework on investment companies. You can find a comprehensive list of London-listed investment companies on its website, which includes details like NAV, a company’s dividend yield and links to important information.

Investment companies that pay dividends – lists:

UK investment companies that pay quarterly dividends

Bi-annual and annual dividend payers