By Robert Rapier, Investing Daily, Thursday, October 8

The third quarter of 2026 delivered another sharp change in market leadership, continuing a pattern that has defined the year so far. After finishing dead last in the second quarter, Energy surged 16.5% in Q3 and easily led every major sector. At the other end of the rankings, Utilities fell 12.4%, despite the strong long-term demand story tied to electricity consumption, grid investment, and data-center development.

The S&P 500 itself gained just 2.0% for the quarter, but that modest headline return concealed an unusually wide dispersion beneath the surface. Nearly 29 percentage points separated the best- and worst-performing sectors, which meant that simply knowing the direction of the broader market told investors very little about what was happening underneath it. Sector selection mattered enormously.

Energy Takes the Lead

Energy was the clear standout, gaining 16.5% and reversing much of the weakness from the prior quarter. In Q2, the sector had fallen 12.7% and finished last, but I noted at the time that the decline would likely not last. Energy is inherently cyclical, and sentiment can shift very quickly when crude prices, geopolitical risk, or expectations for supply change.

That is exactly what happened in Q3. Crude prices became increasingly volatile as geopolitical tensions tightened global supply expectations, while refining margins strengthened as diesel markets remained constrained. Those conditions improved the outlook for both producers and refiners, and investors responded by moving aggressively back into the sector.

Health Care finished a distant second with a 6.6% gain, which was a solid showing in a quarter when several economically sensitive sectors struggled. Communication Services gained 3.9%, while Technology advanced 2.9%. Technology’s performance was especially notable because it followed an extraordinary 43.5% gain in Q2, suggesting that enthusiasm for artificial intelligence, semiconductors, and data-center-related growth remained intact even as the pace of gains slowed considerably.

Higher Rates Changed the Equation

The other major force shaping Q3 was the interest-rate environment. Rising inflation concerns, higher energy prices, and renewed pressure in the bond market pushed yields higher and changed the relative appeal of many rate-sensitive sectors. That helps explain why so much of the weakness was concentrated in areas of the market where financing costs and dividend yields matter most.

Financials were essentially flat, while Consumer Staples lost 2.3% and Materials fell 3.8%. Real Estate declined 6.3%, reflecting the familiar pressure that higher borrowing costs place on property values, refinancing, and investor demand for income-oriented assets. Consumer Discretionary fell 7.0%, as higher energy costs and tighter financial conditions created a more difficult backdrop for household spending.

Industrials dropped 9.6%, which was a striking reversal after the sector gained 14.8% in Q2. The longer-term themes behind the sector remain intact, including infrastructure investment, defense spending, reshoring, electrification, and the physical buildout associated with artificial intelligence. But Q3 was a reminder that even strong secular trends can be overwhelmed temporarily when valuations, financing conditions, and investor expectations shift.

Utilities Take the Biggest Hit

Utilities were the worst-performing sector, falling 12.4%, and at first glance that may seem surprising. Electricity demand remains strong, data-center development continues to require enormous amounts of power, and utilities are investing heavily in generation, transmission, and grid modernization. None of those long-term drivers disappeared during the quarter.

The problem is that utilities are also among the most capital-intensive businesses in the market. They routinely borrow large amounts of money to finance new generating capacity, transmission lines, and other infrastructure, so higher interest rates can raise financing costs at the same time that rising Treasury yields make utility dividends less attractive by comparison. That combination can create a powerful short-term headwind even when the underlying business outlook remains favorable.

This distinction is important for investors. Falling utility share prices do not necessarily mean that electricity demand has weakened or that the long-term investment thesis has deteriorated. In many cases, the market is simply demanding a higher return because competing yields have risen, which can eventually create opportunities for income investors willing to be selective.

That selectivity is important because not all utilities are equally exposed. Companies with heavy debt burdens, aggressive capital programs, or difficult regulatory environments can come under much greater pressure than those with stronger balance sheets, constructive regulators, and more predictable earnings growth.

Another Quarter, Another Rotation

The most striking feature of 2026 has been how quickly sector leadership has changed from one quarter to the next. Energy led in Q1, collapsed to last place in Q2, and then returned to first place in Q3. Technology went from lagging early in the year to a 43.5% gain in Q2 before settling back to a much more modest 2.9% advance in Q3. Utilities have experienced their own swings as investors alternate between focusing on long-term electricity-demand growth and worrying about interest rates.

That kind of rotation is a useful reminder that sector performance rarely moves in a straight line. The strongest sector in one quarter can easily become the weakest in the next, particularly when the underlying drivers are commodities, interest rates, or rapidly changing investor expectations.

Looking ahead, oil prices and geopolitical developments will remain crucial for Energy. The sector has benefited from stronger commodity prices and tighter product markets, but those conditions can reverse quickly if supply disruptions ease or demand weakens. Interest rates will be especially important for Utilities and Real Estate, since any meaningful decline in bond yields could quickly improve their relative appeal after a difficult quarter.

The AI investment cycle also remains important, but increasingly it should be viewed as more than just a Technology story. Data centers require electricity, transmission equipment, cooling systems, construction, and other physical infrastructure, which means the longer-term effects extend well beyond software and semiconductors. Quarterly market performance will continue to fluctuate, but the underlying buildout is still reshaping capital spending across multiple sectors.

Q3 ultimately reinforced one of the clearest lessons of 2026: market leadership can change very quickly. Energy went from worst to first in a single quarter, while Utilities moved in the opposite direction. For investors, that is another argument against chasing whichever sector just posted the strongest return, because some of the better opportunities often emerge when a sound long-term story temporarily falls out of favor.

Thursday 15 October

Hammerson PLC dividend payment date
Invesco Bond Income Plus Ltd ex-dividend date
Montanaro UK Smaller Cos Investment Trust PLC ex-dividend date
Primary Health Properties PLC ex-dividend date

This “stealth” stock-picking strategy unleashed the power of dividends for 71%, 111%, even 148% returns — in ALL markets.

These could be the next 5 winners …

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Dear Reader,

Few folks know it, but there’s a simple, underappreciated way that a company’s dividend payout can tell you exactly when the share price is about to gap higher.

In one case, this indicator flashed green and the company’s share price ran up an incredible 130% in five years, generating a tight 148% total return!

In another, this signal marked a 92% total return in less than four years. And its proven predictive power even works in volatile markets like today’s.

In fact, it works BEST in unpredictable times like these.

When you see what this strategy is, I guarantee you’ll be nodding along, wondering how you didn’t consider it earlier.

(I’ll show you exactly how we’ll work together to put ourselves in position for surging dividends that help drive price gains, and hedge volatility, a little further on.)

What I’m about to reveal is especially important now, with markets whipsawing and macro uncertainty running high.

This is a perfect — but time-sensitive! — opportunity to use this strategy to protect our wealth now, and grow it as conditions normalize.

And right now we’re aiming straight at 5 overlooked dividend stocks poised to DOUBLE in 5 years or less, while their dividend payouts TRIPLE.

Read on and I’ll show you exactly how.

Enter the “Dividend Magnet”

My Dividend Magnet strategy consists of 3 “pillars.”

If a stock shows all three of these telltale signs, it’s time to BUY … then ride along as the company’s dividend grows, pulling its share price higher as it does.

And today I’m going to show you, step by step, exactly how the Dividend Magnet delivered that stout 148% return I mentioned a second ago.

Then we’ll discuss those 5 stocks my research indicates are set to soar far ahead of the market in the coming years.

Personally, I think triple-digit gains are squarely on the table with these 5 hidden gems.

But conservative sort that I am, I’m forecasting steady 15%+ annualized returns for the long haul.

That’s enough to double our investment every five years and triple our income stream, too. We’ll happily take that deal! Especially with the low volatility these 5 stocks offer.

Before we go further, though, I should take a moment to tell you a bit more about myself.

My name is Brett Owens and I’m writing to you today from sunny Sacramento, where I’ve lived with my wife and kids since my early days as the founder of a number of tech startups.

But my real passion is dividend investing. You may have seen me on CNBC, Yahoo Finance or NASDAQ, where I’ve been called on to share my methodology for collecting consistent, predictable and reliable retirement income.

My readers and I don’t go anywhere near profitless techs, penny stocks or other gambles you can’t tell your spouse about.

Safety is my No. 1 priority. Always has been. Always will be.

You see, I take a strategically contrarian approach to the markets.

And for the past several years, I’ve helped thousands of readers fund their retirement thanks to what I call “Hidden Yield stocks.”

Take a look at some of the big returns my premium members have seen:

Archer Daniels Midland (ADM): Up 71% in 18 Months (and Counting)

Concentrix (CNXC) Skyrocketed 111.8% in Just 1 Year!

American Electric Power (AEP) “Popped” 27% in Just 8 Months

Of course we both know investing in the stock market does come with some risk, so while we’d like every stock to go up, some recommendations do decline from time to time.

Now, in 2026, there are still plenty of oversold dividends on the board for us, despite the bull market of the last few years. In fact, I expect our next round of picks to do even better than the ones I just showed you.

My Dividend Magnet system continues to be our North Star. I want you to join us.

Whatever your investing goal, this strategy — and the 5 dividend growers I’ll tell you about in a moment — MUST be at the heart of your investment plan.

As you might guess by this point, the humble dividend is the key to our Dividend Magnet approach — but not in the way most folks think.

How Dividends Drove a 75,802% Gain

Dividends really are the “Rodney Dangerfields” of the investing world — they get no respect!

But they should, because growing dividends are the key to thriving through any market.

And if you roll your dividends back into your portfolio, the power of compounding takes over and delivers the sort of growth that tech fanboys (and girls) can only dream of.

Here’s the proof, from our friends at Hartford Funds.

Hartford looked at the years between 1960 and the end of 2025, which included everything: the inflation of the ’70s, economic crashes in 2001 and 2008, the pandemic and, of course, the latest inflation wave.

Here’s what they found: if you’d put $10,000 in the S&P 500 in 1960, you would have had $1,143,013 at the end of the period, based solely on price gains.

That’s not bad: an 11,330% increase.

It shows you why most folks only think about share prices when they invest. After all, with a gain like that, it’s tough to get excited about a dividend that dribbles a few cents your way every quarter.

But here’s the thing: when you reinvest your dividends, the magic of compounding kicks in. The difference is shocking: your $10,000 would have grown to $7,580,231, or more than $6.4 million more than you’d have booked on price gains alone!

That’s a 75,802% profit.

It’s a crystal clear example of how critical dividends are. And you can grab stronger profits if you buy stocks whose dividends aren’t just growing but accelerating.

Which is exactly what we’re going to do in the first step of my 3-part Dividend Magnet strategy …

Step 1: Buy an “Accelerating Dividend”

(for Growth, Income and High Yields)

Even though inflation is sticky now, and rates are still relatively high, in the long run, my forecast is for lower rates.

Why? Today’s inflation largely stems from higher oil spurred by the Iran situation, which will end at some point. (Neither country can afford it to continue.)

In fact, had the conflict not occurred, we’d almost certainly be talking about rate cuts today.

This situation echos 2018, when rates were elevated but Fed chair Jay Powell was edging toward rate cuts.

Lower rates, of course, are great for utility stocks — “bond proxies” that tend to rise as rates fall. So in November of that year, we picked up cell-tower landlord American Tower (AMT), a REIT whose “tenants” include AT&T (T) and Verizon (VZ).

We liked AMT because it’s a classic “tollbooth” play.

The company charges its clients for using its tower network, then hands that cash to investors as a steadily rising dividend. Buying AMT is a much better move than trying to pick winners among the big telcos.

You can see that in AMT’s performance as rates fell during our holding period: It crushed Verizon, America’s biggest telecom provider.

Even better, unlike pretty much any other stock, AMT had been raising its payout every quarter, to the tune of 65% during our holding period!

That rising payout acted like a “Dividend Magnet,” pulling up the share price in lockstep and delivering the 57% total return you see above.

That’s the “Dividend Magnet” in action — I’ve seen it work its magic on share prices time and time again. Like the stunning 148% it drove in our next stock, a chipmaker founded way back in 1930.

TXN’s “Accelerating” Dividend Powered

Us to a 148% Return

Texas Instruments (TXN) is far from the stodgy calculator peddler it was 30 years ago. Today, its analog chips power everything from appliances to industrial sensors and, yes, AI data centers.

Management is known for making shareholders’ interests a priority, and it doles out that cash to them on the regular. Those payouts, in turn, have powered the stock’s Dividend Magnet.

TXN’s dividend soared 120% over the 5 years we held it, helping us bag that 148% total return I mentioned earlier.

It was all thanks to the Dividend Magnet, which you can see pulling up TXN’s share price:

TXN’s Dividend Magnet Fires Up

130% dividend hikes. 120% price gains!

Add those payouts and gains together and you get that stellar 148% total return.

The two “dividends up, share price up” patterns I just showed you were no coincidence.

In fact, this predictable setup can not only tell us when to buy, but when to sell, too …

Consider utility American Electric Power (AEP), which I recommended in February 2024. My readers only held this one for a short time, for the best of reasons: It took off! By the time we sold in October, we were sitting on a sweet 27% total return.

But the reason why we bought AEP in the first place was its powerful Dividend Magnet.

In the preceding decade, its payout had shot up 76%, and its share price had tracked it higher point for point.

Though by February 2024, a gap had opened up. That was our “in”!

AEP’s Payout Pulled Its Share Price Higher, Until a “Payout Gap” Gave Us Our Shot

We pounced. And by October, the share price had closed the gap.

This was important because when a share price catches up to a dividend, and moves past it, it’s a key sell signal.

Share Price Catches the Payout, and We Take Profits

Once the 10-year gap between the price and dividend “reconnected,” we took our quick 27% gain off the table. And rolled it into the NEXT dividend grower!

This is hands-down the most exhilarating part of investing in Dividend Magnet plays like these: When investors (finally) catch wind of them, the stock can pop virtually overnight!

Do all of our calls work out like these? Of course not. I wouldn’t insult your intelligence and say they do. Investing in the stock market involves some risk, even with top-quality large-cap names like these, and you can lose money.

But I think you can see where I’m going here: we buy accelerating dividends, ride them higher and collect bigger payouts and price gains over time. This gives us a huge built-in advantage over investors who rely on traditional measures like earnings per share (EPS) growth, P/E ratios or whatever.

Now that we’ve seen how the Dividend Magnet can tell us to buy (and sell), let’s boost our payout-powered gains with a (wrongfully!) disrespected share-price driver: share buybacks.

Step 2: Toss in a Buyback “Afterburner”

Buybacks get a bad rap, but they shouldn’t, because when done right (i.e., when a stock is cheap), they can light a fire under share prices.

They work by cutting the number of shares outstanding, which boosts EPS and, in turn, share prices. They also boost our dividends because they reduce the number of shares on which a company has to pay out.

And when you combine a solid buyback program with an accelerating dividend, you get something very special indeed!

To see what I mean, let’s loop back to Texas Instruments. The company backstopped its Dividend Magnet with a steady buyback program during our holding period.

That took nearly 7% of its shares off the market:

TXN’s Buybacks Give Its Stock an Extra Kick

As you can see, the company’s Dividend Magnet is humming along beautifully, pulling the share price up as it goes.

Meantime, the buybacks kicked in an extra boost, pushing the shares ahead of TXN’s dividend growth!

Step 3: Use This Powerful Indicator for

Extra Dividend (and Share Price) Safety

Finally, we’re going to safeguard our gains and dividends by purchasing stocks with low beta ratings.

Low what?

Don’t get too hung up on the jargon here.

Beta is a measure of volatility that you’ve probably seen on your favorite stock screener. A stock with a beta of 1 moves at roughly the same speed as the market (up or down). Betas below 1 are less volatile; those above 1 are more volatile.

For example, consider pharma giant AbbVie (ABBV), whose sturdy business results in a steady stock price.

ABBV has a 5-year beta of 0.3, which means it’s 70% less volatile than the S&P 500.

In other words, on days when the S&P 500 is down 3%, this stock should be down less than 1%.

That’s the theory.

In reality, it’s even better.

AbbVie is one of a tiny group of equities that actually gained through the 2022 mess, and by no small amount, either:

ABBV Soared in the 2022 Market Mayhem

Plus, this stock has a potent Dividend Magnet!

Check out how the share price (in purple below) has tracked the payout (in orange) over the last decade, during which we’ve seen rate hikes, rate cuts, a global pandemic, surging inflation and, yes, trade wars.

ABBV’s Dividend Magnet Drives Steady GAINS

Despite COVID, Inflation, Market Volatility and More

We’re not recommending ABBV today, because the share price has leapt ahead of dividend growth, as you can see on the right side of the chart above. This shows that ABBV is currently overvalued.

Taken together, this gives us a clear picture of how a rising dividend, buybacks and a low beta rating give this one downside protection, making it a true “recession-proof” dividend.

Keeping it simple: dividend reinvestment

This article explores how a Dividend Reinvestment Plan (DRIP) can help build your shareholding and support long-term investment growth.

Aiming for a success of stock market investing is often less about identifying tomorrow’s big winners, and more about getting the basics right. Regular investment in a diversified portfolio is a more realistic long-term strategy than trying to find the next world-beating technology company. Dividend reinvestment is a straightforward option to support the growth of your investments over time. 

How does it work? Many investment trusts pay a dividend, with the average yield across the sector sitting at 3.3% . For many trusts, paying a regular and growing dividend to their shareholders is as important an objective as growing capital. There are a range of trusts with a long history of growing their payouts to shareholders through all types of financial market conditions. 

You have a choice on how you receive that dividend. You can take the cash, or you can reinvest it to buy more shares. This service is available through investment platforms, or through a Dividend Reinvestment Plan (DRIP) usually available through an investment trust’s registrar. If you choose to buy more shares each year, your shareholding gets a little bigger. You then receive dividends paid from that larger shareholding. Reinvested shares effectively earn their own future dividends. This creates a virtuous circle, helping to grow your portfolio steadily over time. 

Over time, this compounding effect may be significant. Take a hypothetical portfolio of 100 shares, with a current value of £1,000. The trust declares a dividend of 4% (equivalent to £40) and the investor chooses to reinvest it in more shares. They now have 104 shares, valued at £1,040. That doesn’t sound particularly impressive, but making the same reinvestment year after year compounds the effect. After a decade, the investor would have around 150 shares. Even if the share price hasn’t moved at all, an investor would still have seen their investment grow to £1,500, and their dividend would be worth £60 a year. 

Add in capital growth and the effect is stronger. While capital growth can’t be guaranteed, Evelyn Partners analysed the performance of the FTSE 100 over the last forty years to 2025. Over that period, it made a capital return of 391%. But with UK dividends reinvested the total return hits a vastly higher 1,926% . While it can feel like a real bonus to have a regular dividend landing in your bank account, the sensible long-term strategy is likely to be a dividend reinvestment plan. 

You can also benefit from pound cost averaging. This is usually discussed in the context of making regular investments in the market, but also applies to dividend reinvestment. If the share price is low, an investor’s dividend payment will buy more shares. If it is high, it will buy fewer, but the investor will have made some capital gains. In this way, it can help smooth out returns over time, providing some insulation against market volatility. 

How to do it

Most investment platforms have a dividend reinvestment option for the investment trusts held on them. Equally, investment trust company share schemes will also offer you the option to reinvest rather than take dividends as cash. Usually, it is just a question of ticking a box, but every platform is different. Once this is done, there are no further decisions to make – every time an investment trust pays a dividend, the platform will automatically buy more of the same investment. If you don’t do it, your dividends will simply be paid into the cash account on the platform, or directly to your bank account if that is what you have requested. 

There are a number of factors to consider when reinvesting dividends. The first is tax. Dividends are taxable whether you take them as cash or reinvest them in more shares. Investors’ first priority should be to use tax-sheltered investment options such as an ISA or SIPP, particularly for higher rate taxpayers. Within both wrappers, dividends are tax free, so you get to keep the full amount, and the effects of compounding are greater. Reinvested dividends still make sense outside a tax wrapper, but you will need to account for additional tax on your annual return. 

Another consideration is cost. Platforms will often make a charge to reinvest dividends, as they would with a normal share transaction. Some platforms give a much-reduced price for reinvesting dividends – less than £1 in some cases. With others, you may be paying standard share dealing costs. This can eat into the compounding effects of dividend reinvestment.  If reinvestment is a priority, it may be worth choosing a platform that makes the process simple and cost-effective. The Association of Investment Companies (AIC) provides a useful comparison of automatic dividend reinvestment fees charged by many of the UK’s most popular investment platforms, available here. 

Dividend reinvestment is a straightforward option to build a potential larger holding in an individual investment trust. Over time, reinvesting dividends has proved a powerful way to improve the compounding effect of stock market investment. For those who don’t need the income from their investments for day-to-day spending, it is an option worth considering.

Important information

Risk factors you should consider prior to investing:

• The value of investments and the income from them can fall and investors may get back less than the amount invested.

• Past performance is not a guide to future results.

• Tax treatment depends on the individual circumstances of each investor and be subject to change in the future.

• If you require advice please speak to a qualified financial adviser.

This Year (and Got Cheaper at the Same Time)

Michael Foster, Investment Strategist
Updated: October 8, 2026

Joblessness rose last month. And stocks jumped on the news.

It’s weird. And it’s giving us a rare chance to pick up a well-funded 6.8% dividend for 12.3% off its “regular” price.

This deal exists because the fund behind that healthy payout—a tech-focused closed-end fund (CEF) called the BlackRock Technology and Private Equity Term Trust (BTX)—is smack in the middle of a very profitable setup.

That is, both its price on the stock market (in purple below) and the value of its underlying portfolio (its net asset value, or NAV, in orange) are soaring this year:

BTX Skyrockets in 2026 …

The fact that both the portfolio and market price can move independently of each other is a unique feature of CEFs. It’s one we contrarians can (and do!) take advantage of.

Especially in the case of BTX, whose NAV has been doing something interesting lately: rising faster than its price. That’s pushed the fund’s discount to NAV out. It’s now 12.3%.

In other words, we can buy this star performer for 88 cents on the dollar.

That’s right: A fund whose price has popped 41% in a little over nine months is actually cheaper than it was just over a month ago.

… And Goes on Sale at the Same Time

Try finding a deal like that in “regular” stocks! It can’t be done.

BTX’s performance is the kind of bounce-back we expected in February, when we bought the fund at my CEF Insider service after it fell victim to the “SaaS selloff.”

Remember that? It seems like years ago, but it was when investors panicked over fears AI would cripple software stocks as everyone learned to “vibe code.” We saw this fear as overdone, so we bought. Since then, BTX has returned 47% (including reinvested dividends).

We’re going to talk more about this fund’s holdings and strategy in a sec, but there’s something else we need to discuss first. It’s the reason why we’re being particularly aggressive in targeting undervalued income plays like BTX now.

Jobs Report Another Reminder We’re in “Upside-Down World”

To get at that, I want to bring your attention to the latest jobs numbers, released last Friday. They showed that only about 29,000 positions were created in September, well below the 90,000 economists expected.

Right after the report came out, something strange happened: Stocks rose on the news.

On the surface, it makes zero sense. If job numbers disappoint, the economy is by extension weak—and stocks should sell off.

But the details matter here. What we’re going to get into next points to why stocks rose, why I see them as likely to keep rising—and why underpriced equity CEFs like BTX really are in the driver’s seat here.

Let’s start with the overall jobs picture.

As mentioned, the US economy added 29,000 jobs in September, fewer than expected. That slippage feels like a long-term trend. The chart above shows that the number of jobs being added to the economy has been sliding for three years.

But this isn’t the bad news story it looks like. Because there are two longer-term shifts that explain it, and both point to a “balanced” labor market that’s great for the economy.

The first is a sign that Americans are growing richer: More of them are retiring earlier. As a result, the labor force participation rate for the 55+ set has fallen.

So with fewer older people working or trying to find work, the total number of jobs the economy will add at any given time should decline, as well. This, in turn, lowers the “breakeven” point needed to keep unemployment low and steady.

Then there’s the immigration story.

If we look at immigration purely from an economic standpoint, the facts are clear: Fewer people are coming to America to work. That will mean fewer job seekers, and thus fewer jobs added to the economy. Again, this lowers that breakeven mark needed to maintain a healthy unemployment rate.

Economists have known about this for a while. It’s why expectations of job growth have fallen. And while last month’s numbers were below expectations (and we’ve seen some revisions downward in recent months), these differences aren’t enough to cause alarm.

Why This Is Good for Stocks (and Our CEFs)

In fact, those downward revisions are a reason for stocks to rise.

That’s because the job market is in a sweet spot: not so hot that it pushes the Fed to raise rates further, but not so cool that income growth stalls. (And as if to prove the point, odds of an October rate hike fell after the jobs report was released.)

Research from Bank of America shows that lower-income groups saw 4.7% year-over-year after-tax wage growth in August. That’s higher than that month’s 3.4% inflation rate. While inflation is still too high, the result of higher-than-inflation wage growth is likely to be continued gains in corporate sales and profits.

Back to BTX

Like I said, the stock market saw a lot of this coming and reacted. Beyond last Friday’s bounce post-jobs report, we’ve seen S&P 500 index funds rise about 14% on the year, while those for the tech-focused NASDAQ 100 are now up around 20%.

Note, however, that while those gains are hitting index funds, CEFs investing in US stocks have dipped slightly and trail the two major indices on the year, with a 9.35% total return as of this writing.

This is a strange situation that’s caused discounts among CEFs to expand to very wide levels, now 8.9% on average.

BTX, of course, is even more of a bargain, with that 12.3% markdown. That’s way too cheap for a fund that holds names like Micron Technology (MU), Lumentum Holdings (LITE) and NVIDIA (NVDA), all high-flyers fueling the AI revolution.

Moreover, BTX gives us some exposure to pre-IPO tech firms, as well—including Anthropic. That makes it a good “one-stop shop” for your portfolio’s tech bucket, especially since we individual investors can’t buy pre-IPO companies ourselves.

Then there’s the 6.8% dividend, which is well below the fund’s total NAV return this year. And when you calculate it based on NAV—not the discounted market price—the figure gets lower still: around 6%.

That leaves us with the trifecta we love to see in CEFs: strong performance, a wide discount, and a dividend well supported by NAV returns.

BTX is also the poster child for something else we’ve discussed many times in these columns: the slowness of CEF investors to respond to market changes, compared to those who buy regular stocks.

But the thing to bear in mind is that these investors typically do catch on eventually—especially when there’s a steady 6%+ dividend on the table. Getting in now lets us take advantage of that lag and kickstart BTX’s 6.8% dividend, too.

Treasuries? Forget ’Em. These 4 AI Funds Pay 10% (and They’re Cheap) 

BTX isn’t the only AI-focused CEF investors have been slow to notice.

I’ve found 4 more. They yield 10% on average, and they trade at discounts that have been blown way out of proportion, too.

A setup like that sure beats Treasuries.

Our latest question asks whether there’s a price to pay for the convenience of a monthly flow of income.

by Kyle Caldwell from interactive investor

Name withheld asks: I’m weighing up my options ahead of retirement. My portfolio consists of growth-focused funds and shares, but I’m considering a change in approach and giving the portfolio more of an income focus. I like the idea of trying to withdraw only the income generated from the investments each month, but I’m not sure how feasible this is. I’m planning to hold both income funds and some FTSE 100 dividend-paying shares. For funds, should I just focus on those that pay a monthly income to make life easier?

Investors looking for regular income have far more choice nowadays. More than 100 funds now pay monthly distributions, compared with only a few dozen 15 years ago.

• Invest with ii: SIPP Account | Stocks & Shares ISA | See all Investment Accounts

The approach is convenient as such funds automatically generate a stream of cash that will be paid out each month. However, I would urge investors to view the regularity of the income payments as a “nice to have” rather than a must-have.

Instead, prioritise whether the way in which the fund invests (its asset allocation) meets your risk profile and objectives. In addition, size up the fund’s track record and consider the expertise of the management team, including how long they’ve been running money. If a fund falls short on these measures, its monthly payout schedule alone shouldn’t be enough to earn it a place in your portfolio.

For me, it doesn’t make sense to rule out funds or investment trusts that pay quarterly, or even half yearly. With a little planning, investors can create a monthly income stream by combining funds and trusts that make distributions at different points throughout the year.

In addition, going solely down the income fund route can increase risk and reduce diversification as fund managers are restricted to owning a range of stocks or bonds to deliver on their objectives.

One way to create a more diversified retirement portfolio is to take a total return approach. Instead of relying only on dividends and interest for income, withdrawals can be funded from the portfolio’s overall returns.

For example, an investor aiming for £1,000 a month doesn’t need all the investments to pay £1,000 a month in income. A portfolio generating £700 in dividends and interest could be topped up through regular capital withdrawals, potentially giving you access to a broader range of investments.

Another thing to bear in mind is the shortage of options for investors on the lookout for monthly income funds that focus solely on equities. Most monthly income funds invest in bonds or adopt a multi-asset approach (shares and bonds).

For bond funds that pay a monthly income, there’s a tendency to focus on high-yield bonds, which carry greater risks than high-quality bonds, such as UK gilts.

That being said, multi-asset funds throwing off regular income are potential core holdings for retirement portfolios. Below are some of the options, although as mentioned, it is important to judge the fund on its merits.

For investors set on receiving monthly distributions, the following funds may be worth further research.

Those that pay out monthly and hold between 20% and 60% in shares include abrdn Diversified Growth and Inc I Inc (B1C4288) (yield of 4.4%); Artemis Monthly Distribution I Inc (B6TK3R0) (yield of 3.7%); Invesco Distribution UK Z Inc (B8N4543) (yield of 4.4%); Premier Miton Cau Mthly Inc B Inc units (B79QBF9) (yield of 4.9%); and Schroder Monthly Income Z Inc (B66FVB8) (5.6%).

Funds that invest solely in UK shares and pay a monthly income include AXA Framlington UK Equity Income Z Inc (B8HHY29) (yield of 3.9%); Fidelity Enhanced Income W Inc (B87HPZ9) (yield of 6.9%); and Man Income Professional Inc D (B0117D3) (yield of 4.1%).

Yield figures, provided by Morningstar, reflect the 12-month average.

How do monthly income funds work?

The fund manager invests in shares, bonds, or a mix of the two. The amount of income generated is based on the dividends the underlying holdings have paid each month.

Therefore, as with any fund, the income can vary, but to counteract this most of the funds smooth the dividend payments into 11 equal amounts, followed by a final payment of everything that’s left over.

Investors need to select the “income (inc)” share class to receive the cash each month into their account. A fund’s factsheet will contain the income payment dates and the past dividends per share. 

Investment trusts vs funds for regular income

As seasoned investors can testify, the investment trust structure can work very well for investors looking for a regular income stream.

This is because one of the advantages of investment trusts is their ability to squirrel away income for a rainy day. Up to 15% of income generated each year from underlying investments can be saved, in what is called revenue reserves.

When there’s a period where the income from underlying investments dries up, for example during the Covid-19 pandemic and the financial crisis, investment trust boards can utilise those reserves and top up shortfalls. 

This is why there are an impressive number of investment trusts that have raised their dividends year in, year out, for long periods, with 20 increasing their dividends for more than 20 years. 

In contrast, open-ended funds don’t have the same option when there’s a lean income period. Funds are required to return all the income generated to investors. Therefore, if the underlying investments held by the fund are making less money, less income will be paid to investors.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. 

New to income investing, one customer wonders what he wants.

by Dave Baxter from interactive investor

Mike asks:I have been investing for growth for many years and am finally approaching a point where I can consider retiring.  

I have a sizeable amount invested in pensions and an ISA but am new to the idea of income investing. What level of yield should I be targeting? 

Investment income can be a great way to fund a comfortable retirement. 

But assessing the yields on offer can be a tricky game, whether you are looking at individual shares, equity income funds or other asset classes such as bonds. 

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As is often the case in this series, your individual circumstances and preferences will provide a better answer than any broad rule of thumb. 

Firstly, anyone approaching retirement should ask how much money they will expect to need over the coming decades, and ideally carry out cash flow planning. 

This exercise involves you mapping out your future income versus your expected outgoings over the course of retirement. 

While not an exact science, it can give a sense of how much money you might need from a portfolio. 

Cash requirements can often be higher in the earlier years of retirement before falling, and then potentially rising back up later in life because of factors such as potential care costs. 

This is an area where individuals can often benefit from consulting a financial adviser. 

Once you know how much you need, you can see how much money your portfolio might need to generate as a percentage. 

To go with some very easy maths, an individual lucky enough to have a £1 million investment portfolio could get £40,000 a year by generating a 4% yield. 

However a few other considerations are worth weighing up. 

You might also want your portfolio to generate some growth, so as to keep up with inflation. 

The same thinking applies to dividend growth, given that you ideally want your income to keep up with rising costs. 

A starting point

That immediately brings us to a handful of potential options. 

The recent sell-off in bonds means that yields again look interesting, with a UK 10-year government bond currently yielding north of 5%.  

That would be a “safe” investment for those who simply hold it to maturity and keep collecting the interest payments, though said payments would not increase over time. 

Similarly cash-like funds such as Royal London Short Term Money Mkt Y Inc (B3P2RZ5) can see the returns they generate rise in line with interest rates, giving you some level of income while avoiding substantial investment risks. 

Those who do want to see increases in their pay out will often turn to the equity market, and UK large-cap shares do command a following thanks to their dividend records. 

In the fund space many investment trusts have lengthy records of dividend increases, with the so-called “dividend heroes” including City of London Ord

CTY

 Bankers Ord

BNKR

 Alliance Witan Ord ALW Caledonia Investments Ord CLDN The Global Smaller Companies Trust Ord GSCT F&C Investment Trust Ord FCIT and Brunner Ord BUT. 

However not all so-called heroes have such high yields, with names like Scottish Mortgage Ord

SMT

 (on a 0.3% yield) on the list.

It’s therefore worth asking if the yield seems sufficient in the first place. 

Judging yield itself

The UK market is awash with juicy dividend yields, even after recent price gains have pushed some of these down.  

An individual picking investments based on yield alone might be tempted by names like Ithaca Energy Ordinary Share ITH

on around 9%, Legal & General Group LGEN

0.90% on 7.4% or Imperial Brands IMB5.06% on 6.6%.  

The investment trust sector, which has been under quite some pressure in recent years, can go even further on this front. 

NextEnergy Solar Ord

NESF

 yields 16.5%, for one. 

But here comes the health warning: yields, which move inversely prices, can point to trouble if they are especially high. 

One very broad rule of thumb is that any yield of 7% or more should invite questions. 

Ask, for example, whether the dividend seems sustainable. Is the company or trust facing trouble, and is the dividend actually sustainable?  

NextEnergy Solar, for one, actually slashed its dividend pay out earlier this year and is looking to prioritise a reduction of portfolio debt after multiple challenging years. 

It can therefore make sense to scour a high-yielding company’s results and disclosures to see see if it faces problems, and to check metrics like dividend cover. 

Generally a dividend cover ratio of 2 or higher is consider a reassuring level. 

As ever, diversification can be your friend here. 

An investor with income requirements would do well to diversify, by equity region but also by asset class and by yield level. 

Similarly, it could make sense to hold some growth funds alongside those names more focused on yield. 

While some investors are happy with this, it can also make sense to ask whether you are sacrificing better total returns for a chunky dividend payout. 

That’s a conundrum we have often discussed when it comes to the popular investment trust Henderson Far East Income Ord HFEL

The trust’s yield tends to sit at, or just below, the 10% level. 

But it has lagged the competition by total returns in recent years, meaning shareholders are certainly sacrificing greater gains elsewhere, for now.