The dividend allowance is staying at £5,000 – for now

Good news for dividend investors – the Government has made a U-turn on its plan to cut the dividend allowance from £5,000 to £2,000. The change was announced in the Spring Budget by Chancellor Philip Hammond, but has been dropped from the Finance Bill in the lead up to the snap general election on 8 June.

What is the dividend tax allowance?

The tax-free dividend allowance lets you take up to £5,000 of income from dividends without paying any Income Tax. Above this amount, dividend payments are usually taxed at between 7.5% and 38.1% depending on which tax band you are in. If your dividend-paying shares are held in an ISA you won’t pay any tax at all.

The power of dividends

Dividends are small portions of a company’s profits paid to shareholders, usually every three months. This makes them a popular choice for investors looking for a regular income, especially as interest rates on savings accounts are currently at all-time lows.

Dividends aren’t just great for income-seeking investors though – reinvesting them can significantly boost your total returns. Historically, much of the total return from UK equities has come from reinvesting dividends. Over the last 25 years the FTSE All-Share index has grown 214%, but this figure jumps to 644% if reinvested dividends are included*.

Four fund picks for dividend investors

Equity income funds are a great option for investors looking to hold dividend-paying companies. Here are four of our research team’s top fund picks.

Threadneedle UK Equity Income – the UK is one of the highest yielding stock markets, with household names such as HSBC and GlaxoSmithKline paying out consistent dividends. This fund invests in these big names alongside medium-sized companies that are likely to grow their dividends over time.

Evenlode Income – this fund has a big exposure to the consumer goods sector. The top two holdings are Unilever – whose many brands are present in 98% of all UK households**, and Diageo – alcoholic spirits producer operating in 21 markets across the globe. The fund aims to give investors a yield in line with the broader market, but with less volatility.

Woodford Equity Income – this £9.5 billion fund from star fund manager Neil Woodford focuses on UK companies and invests heavily in the healthcare sector. Woodford believes that the sector “offers investors an exceptional opportunity and considerable long-term value,” with some innovative treatments in the pipelines that the market has failed to acknowledge over the last 18 months.

Artemis Global Income – a global fund that invests in big companies such as General Motors and mining firm BHP Billiton. The fund also has a higher weighting to mid-cap companies than its peer group, including Italian telephone tower company INWIT and US lender Zions Bank.

If you have any questions about your investments or these funds, speak to our experts on 020 7189 9999 or best@bestinvest.co.uk

This article does not constitute personal advice. If you are in doubt as to the suitability of an investment please contact one of our advisers. Please also read the risk warnings below before investing.

*Source: Lipper for Investment Management, data to 31/01/2017.

**Source: www.unilever.co.uk/brands, at 09/05/2017.