Against a backdrop of rock bottom interest rates on cash and meagre bond yields, the income available from stock markets stands out as an opportunity. For those prepared to commit to long term investing, and accept the risks, an annual income yield in excess of 4% is a realistic goal.
What's more, according to renowned fund manager Neil Woodford, generating this level of income does not mean compromising on quality. He maintains there are presently opportunities to invest in companies with strong balance sheets and dependable earnings, capable of sustaining generous dividends; and for those dividends to grow over time.
Introducing CF Woodford Income Focus Fund
The CF Woodford Income Focus Fund will aim to offer investors a yield of at least 20% more than the income delivered by the FTSE All Share index over a rolling five-year period. Presently the FTSE All Share yields around 3.5% annually. The new fund is to be managed with the same philosophy and approach as the CF Woodford Equity Income Fund, which launched two and a half years ago and currently yields 3.4%; but it will aim for a significantly higher income, which will be paid quarterly. Yields are variable and not guaranteed.
Like CF Woodford Equity Income, it will invest chiefly in UK stocks but Mr Woodford will have greater flexibility to invest in overseas companies in order to maximise the number of high dividend opportunities. As such the fund will reside in the Investment Association Specialist sector, though international exposure is not expected to exceed 20% at outset and will likely be confined to larger companies in areas Mr Woodford has existing expertise.
The Income Focus Fund is likely to be more dedicated to larger business. Unlisted smaller companies, a feature of CF Woodford Equity Income, offer exciting growth potential but little in the way of income, so they won’t be included. Essentially, the greater focus on income generation means more of the returns are likely to be delivered by income. There will be less emphasis placed on growing capital and less potential to grow pay outs, though inevitably there will be some commonality in holdings. The new fund will also be more concentrated with fewer holdings - around 50 stocks as opposed to in excess of 100 in CF Woodford Equity Income.
What will the fund invest in?
While we don't know which stocks Mr Woodford has in mind, given his current views certain areas will be on his radar. For instance, he sees opportunities in the pharmaceuticals sector given aging populations across the world and the pressing need for innovation to produce new drugs and therapies. In contrast, Mr Woodford is unlikely to be enticed by large dividends in the energy and commodities space as he is sceptical about their sustainability. Mr Woodford emphasises, though, this is very much a stock picking approach, with sector exposure a function of his conviction in individual businesses.
When will the fund be available?
The fund will be available at a fixed unit price of £1 from 20th March 2017, with the launch period closing at midday on 12th April 2017.
Neil Woodford is deservedly one of the best known and most successful fund managers in the UK. He has an exceptional track record of investing in established, stable businesses providing good dividend income. His income funds have excelled both during his time spent at Invesco Perpetual and following his move to found his own investment boutique in 2014.
Mr Woodford has also demonstrated a long term, patient approach with prescient economic judgement, which suggests he is well placed to navigate the current uncertain environment. He famously avoided the technology ‘bubble’ and subsequent crash of the late nineties and early 2000s, sticking to his tried and tested strategy of backing solid, reliable businesses in less glamorous areas such as tobacco and pharmaceuticals. He also expertly steered his funds through the credit crisis of 2008/09, avoiding banks, the worst hit sector. Thorough industry analysis including research of companies with emerging and potentially disruptive technologies (some of which he invests in via his other funds) can also afford him great insight.
This new launch, the third and final fund Mr Woodford has committed to manage, will undoubtedly be of interest to many investors who prioritise income. Although total long term returns (income plus capital growth) are likely to be lower than from the other funds, CF Woodford Equity Income Fund and the purely growth-orientated Woodford Patient Capital Trust, this new fund is likely to produce a highly attractive yield. With great flexibility afforded to the manager and a high conviction approach of backing a select number of stocks, it is worth considering as a core constituent of a portfolio aimed at generating a high income.
This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investment decisions in collectives should only be made after reading the Key Investor Information Document, Supplemental Information Document and/or Prospectus. Investors should be aware that there is no guarantee that any specific level of dividend or yield will be achieved over any given time period. If you are unsure of the suitability of your investment please seek professional advice.