Do The UK’s Best Income Stocks Offer Warmth In The Midst Of A Markets Winter?

With the outlook for stock markets looking somewhat bleak, those investing online into ISAs and SIPPs might be struggling for conviction in choosing where to invest regular monthly instalments at present. Of course, investors with a long term view are best off ignoring short term market volatility and downtrends and stick to their convictions if they see value and potential in companies or funds. However, does the current wintry chill sweeping equities strengthen the case for taking refuge in stocks that pay consistently strong dividends?

Investors can be put off focusing on income from dividends rather than capital gains by purely looking at returns based on current returns against an initial investment. For example, the average UK income fund will currently return between 4.5% and 5% based on the original investment. Global funds are poorer at somewhere around the 2.5% mark, which is a negative when taking inflation into account.

But it’s important to remember that over a longer period of time, taking into consideration compounded returns, those figures increase significantly. If a £10,000 investment returns 4.7% today, having invested in the same fund 10 years ago and reinvesting all dividends over that period, the yield would turn into a much more attractive 8.4%. And in the case of the unattractive 2.5% from the global fund example, a more acceptable 4.7% only on income and before any capital gains.

The risk of investing for dividends is that they can be reduced or cancelled with no notice. However, unless forced into it, fund managers and companies try to avoid doing so. Dividends are used to encourage investors to keep the faith during tough times and especially mature companies with strong cash generation but slow growth are very keen to avoid such a step. If anything, they tend to slightly boost dividends when stock markets are struggling and share prices falling.

And with markets currently down, fund and individual stock dividend yields are up, making it a promising moment to invest for income long term. When markets recover, yields as a percentage of initial investment are likely to benefit significantly. So regardless of the Brexit and wider international jitters that seem set to mean 2019 is another volatile year, income investors might consider building up their insulation with some funds and stocks with an attractive history of dividends.