What are my high-yield investment options?
Ever since the financial crisis, income investors have been hunting yield. With interest rates at historic lows and central banks pouring money into the global economy, it has been hard to come by.
Ever since the financial crash, income investors have had one thing on their minds: yield, and how to get more of it. The problem is that central banks rushed to introduce special measures to boost the economy in the wake of the crisis, hitting yields hard in the process. They ushered in an era of ultra-low interest rates.
Interest rates remain at an all-time low, but inflation is starting to rise, so testing times will continue for a while.
What’s the difference between yield and return?
Yield and return are often used to describe investment performance, but they are not the same thing and it’s important to know the difference.
|Investment or Total Return||Investment yield|
|What an investor has actually earned on an investment over a time period in the past||Forward looking measure of what an investment is likely to earn over a future period|
|It includes capital gains as well as income such as dividends and interest||It takes into account income like dividends or interest but excludes capital gains|
|Yield figures are usually annualised with the assumption that interest or dividends will continue to be received at a constant rate|
Dividends from companies are still the bedrock of investment returns, and the fall in sterling after the Brexit vote last June gave a boost to the dollar-earning dividend giants of the FTSE 100.
But a rise in sterling could negate that this year, as Jason Hollands, managing director at adviser Tilney Bestinvest, notes: ‘Last year saw companies pay out around 90% of their earnings, an exceptionally high level, and this means there is a limited headroom for further dividend growth.’ He adds that almost 40% of the pay out from the FTSE 100 comes from just five companies.
But equity income funds continue to attract investment flows. These funds target companies they believe to be the most reliable payers, offer yields of between 3% and 5%, and are likely to be more resilient in volatile markets than funds aimed at growth.
Some funds, such as the Murray International Trust, which yields around 4%, target both growth and income and invest globally.
The FTSE All-Share Index currently offers a yield averaging 3.5% while the high-yield segment yields 4.9%, according to Numis Securities.
Bonds are traditionally less volatile than shares. They tie up your capital until the bond’s maturity date, but are also traded on the stock market like shares at prices which reflect supply and demand.
Corporate bond funds, which buy the debt issued by companies, offer yields typically of 3% to 4%. They have been favoured by investors prepared to move up the risk ladder from government bonds paying 1% to 2%.
Property fund yields higher, but risks also rise
But investors seeking higher yields yet will have to move a little higher up the ladder.
Property funds offer exposure to expertly-managed portfolios of offices, shopping malls and business parks where rental incomes and capital growth may support yields of 5% to 7%.
Hollands says: ‘The UK commercial property market had a bit of a wobble last summer, as some investors panic sold in the wake of the EU referendum and there remains some uncertainty around the London City office market, with talks of banks moving functions into the EU. But many other areas have proved very resilient, even benefitting from a boost to exports.’
Higher-yielding corporate bonds, as opposed to so-called ‘investment grade’ bonds, invest in the debt of companies with less solid credit ratings and therefore more at risk of default. In the same (or even higher) risk zone are high-yield bonds issued by emerging market companies and governments.
Hollands says: ‘Default rates are very low compared to history, but that means they are more likely to rise from here.’
Investors can get access to a mix of high-yielding debts by picking a fund such as Royal London Sterling Extra Yield bond (whose holdings include Enterprise Inns, Investec Bank, Premiertel and Santander UK). It offers a yield of about 5%.
Numis lists six investment trusts offering diversified debt with an average yield of 6%, such as City Merchants High Yield and JPMorgan Global Convertibles Income, and 12 specialising in asset-backed debt, where the average yield is 5%, such as TwentyFour Income Fund.
Jack Holmes, investment manager in the high yield team at Kames Capital, says investors should make sure their bond funds invest ‘in a disciplined fashion in good-quality companies with strong recurring revenue streams.’
The same advice applies to anyone tempted to take the plunge into alternative finance, by lending to individuals or small businesses through an online platform such as RateSetter or Funding Circle. Now also eligible for the Innovative Finance ISA, such investments could yield 6% to 9%, although the risks and guarantees of each platform should be studied very carefully.
The once rarefied world of the bond markets is now more open to ordinary investors, through the twin developments of friendly technology and more sophisticated funds typically using ‘passive’ investment techniques.
ETFs offer low-cost way in to high-yielding assets
Exchange traded funds (ETFs), which are bought and sold like shares but without the stamp duty, use low-cost passive management and can track anything, including an index of high-yielding assets.
For instance, the iShares UK Dividend UCITS has exposure to 50 highest-yielding companies from the FTSE 350 index. The fund currently yields 4.6% with an ongoing charge of 0.4%.
Use our ETF screener to search for dividend and other high yielding ETFs.
Infrastructure funds are in high demand from income investors. They own projects which manage toll roads, hospitals, schools and prisons, based on long-term inflation-linked contracts. Hollands says: ‘The main route to accessing these is through stock exchange-listed investment companies, a number have been raising new cash recently to fund additional projects and this the best opportunity to participate in them.’
Finally there are venture capital trusts where yields are tax free and can be very high. Venture Capital Trusts (VCTs) invest in young, small UK companies so are considered high risk, but there is a tax relief of 30% on newly-issued shares that are held for at least five years.