What is a dividend ladder and how does it help you plan investment income?

If you need income from your investments, the chances are that you also need to be able to predict when you will receive it. That might be every month, if you need it to pay bills, or at certain times of the year if you use it for, say, holidays, or Christmas presents. In achieving this, the concept of a dividend ladder can be useful, ensuring you get the right income at the right moment.

Every company pays dividends

at different times in the year. BP, for example, pays dividends in March, June, September, and December. Vodafone pays its dividends semi-annually, in February and August. The same will be true for collective funds and Investment Trusts. The popular City of London Investment Trust, for example, pays dividends in November, February, May, and August. Alliance Witan pays dividends in June, September, December, and March.

The idea of a dividend ladder is that an investor combines these investments to give them an income when they need it. Most of the major platforms will have information on when companies, Trusts or funds pay their dividends, and investors can shape their investment strategy accordingly. For those who want to be super-sophisticated, they could even flex their dividend payments up and down through the year to help them with more expensive periods.

That said, dividends are not always completely predictable, particularly if you are investing in single shares. Companies will occasionally cut their dividends during difficult periods. Investment Trusts, which have the ability to reserve income in good times to pay it out in weaker times, may be a more consistent option.

Another option is to use the same concept for bond investments. Investors can design a bond strategy whereby bonds mature at different times to form the rungs of the ladder. The investor can ensure that these maturities coincide with their expenses – that might be school fees, retirement, or the annual holiday.

UK government bonds (gilts) are the easiest instrument for UK-based investors. They pay investors two coupon

payments a year and return an investor’s principal on maturity. Investors can create a carefully planned portfolio of gilts with staggered maturities, meaning they will always know the exact date on which they will be paid both the coupon and the principal.

There are a range of monthly income funds that will do this for you. These are usually multi-asset or bond-based strategies. Aegon, Jupiter, Baillie Gifford, Schroder, and Invesco are some of the high profile groups that offer this type of strategy. You need to check whether the underlying investment strategy suits your financial goals and risk profile.