Income investing: BMO strategies for H2 2019

Low bond yields and an uncertain outlook for many high yielding companies, mean that investors may want to reconsider how they build their portfolio.

The value of investments can fall as well as rise, and you may get back less than you invested. Past performance is no guarantee of future results

In the video, Christine Cantrell, sales director at BMO Global Asset Management, explains how investors should think carefully about how they generate income in their portfolios, blending bonds and high quality equities with sustainable yields.

What’s the outlook for income investing?

At present, bond yields are low with 10-year government bonds yielding around 2% in the US and 0.8% in the UK, while Japan sits alongside many European countries such as, France, Germany, Switzerland, and the Netherlands with negative yields.

This is a challenge for investors: what can they own to generate income?

Higher yields are available on corporate bonds, but the level depends on the quality of the issuer and the number of years until the bond matures. For example, investors are currently being paid just 1% more than gilts to own UK corporate bonds with a 0-5 year maturity, which is close to the all-time lows.

The highest yields within fixed income are available in high yield (around 5.3%), though care should be taken here as prices can be especially volatile in stressed markets.

Another consideration for investors is that with the global economy slowing, we are in the unusual environment that longer-term bond yields are lower than short-term yields – the US 5-year yields 1.8% vs. the three-month bond with a 2.1% yield.

This is a clear sign that investors are expecting the US Federal Reserve (Fed) to keep interest rates low and even cut them further, because of a fear of recession. In practice, this means bond holders are not being well rewarded for interest rate risk in bonds over the longer term.

How to invest in quality income with BMO

BMO believe that dividend investing is an important strategy, but it is not as simple as just screening the equity universe and selecting the highest yielders.

They use a screening system, used within the Income Leader ETFs, that ranks all the stocks by fundamental criteria such as their profitability, debt levels and earnings growth. Once a stock fulfils those criteria, their dividend yields can be looked at. This should result in a yield that's more sustainable over the market cycle.

BMO offer these exchange traded fund (ETFs) in the UK (ZILK), Europe ex-UK (SILE), Emerging Markets (ZIEM) and the US (ZILS), with GBP hedged versions also available. Fees range from 0.25% to 0.38%.

Increase your income with a covered call strategy

Another form of income derived from investing in equities, is selling call options. BMO Enhanced Income ETFs employ an options strategy to generate additional yield of between 2% and 4% over the market index dividend yield.

This source of income is not related to the strength of the companies you’re invested in, but instead by how much other market participants are willing to pay for the opportunity to benefit from further price gains in company shares.

With an actively managed options strategy, BMO Enhanced Income ETFs allow investors to access similar returns to the broad equity market (in the UK, Europe or US) but achieve income levels of approximately 7%, 6% and 4% respectively.

Find out more about how a covered call strategy works

You can buy all of BMO’s UK-listed ETFs on the IG platform from as little as £5 by opening an account.

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