Like me, I imagine you have had to work hard for your money and it’s only right that when investing you’re making your money work harder for you. However, with UK interest rates remaining at half a percent for the last six years, income on our cash savings accounts has been virtually non-existent. Yet one of the main reasons for investing is that we want to see a return on our money, so where do we look to find rates that will help us reach our goals?
Maike Curry for Thisismoney.com reported in March 2015 that with income returns on bonds at record lows and company dividends in the UK remaining highly concentrated it’s worthwhile rethinking your strategy for investing for income.
Making your money work harder with Alternative Investments
You may be familiar with the three traditional investment classes – equities, bonds and cash, but the fourth alternative assets can also provide valuable diversification to your portfolio.
‘Real assets’ such as commodities and gold are sometimes used by investors to diversify their portfolio, although most do not generate much of an income or yield on investments. However, other alternatives such as infrastructure and property funds could provide a better exposure to real assets, diversification and income. For example; infrastructure funds spread the investment across a range of infrastructure projects, each with different maturity dates. The value of property is generally a matter of opinion rather than fact.
A note on European Yields
Despite low growth in Europe, companies within this market are some of the highest yielding in the world (with Greece being an exception), because they have kept a handle on costs and sensibly stockpiling cash during the hard times. Today many boast strong earnings, high cash levels and sound balance sheets.
With dividend yields that are typically higher than the income on their own corporate bonds, many companies in Europe can issue bonds to buy back equity and save cash while raising earnings per share.
The range of dividends available in Europe is significantly larger than in the UK alongside a greater number of stocks to choose from. Powerful factors are providing support for European equities including;
- a weak Euro (good news for exports);
- lower oil prices (good news for consumers);
- announcement of ECB quantitative easing (good news for the stock market).
Considering Global Investments
Whilst the UK has a strong dividend culture and UK investors may be more comfortable investing here, unfortunately, the performance of some of the biggest FTSE 100 firms who we have trusted to provide us with an income have been struggling. Oil prices are weighing heavily on energy companies like Shell and BP; certain banks like HSBC are attracting negative headlines; there are fears that GlaxoSmithKline is paying out too much of its earnings in dividends and; Vodafone, may need to service its dividend out of debt, or cut it.
With so many investment opportunities worldwide, looking at global funds and casting your net a bit wider is something you may wish to consider. This allows you to review and pick some of the best income investments from around the world for your portfolio. Looking at adding global investments may also add some much needed diversification if this is one of your objectives.
Investors generally look to equities for long-term capital growth and to bonds for income. However, the financial crisis changed the landscape meaning that equities now usually provide a higher income return than government bonds and also over many corporate bonds, but in turn equities are generally also higher risk investments.
If you are approaching retirement this is very relevant because traditionally, people investing for retirement income are recommended to transfer the weight of the investments in their portfolio towards bonds. Many pension schemes will do this automatically which is a process is known as ‘lifestyling.’
However, if you are retiring at 65 and need your income to last at least another 20 years is this strategy really a less risky? Whilst balancing your risk is important, it’s also important to ensure you are not being too conservative either.
At Bridge, we look at your risk profile versus what you are looking for in terms of returns on your investments and we can discuss what the best options are for your individual circumstances.
Past performance is not necessarily a guide to the future. You may not get back the full amount of your investment. The purpose of this article is to provide technical and generic guidance and should not be interpreted as a personal recommendation or advice.
These links may be useful: www.moneyadviceservice.org.uk and www.direct.gov.uk
Twitter users: Martin Lewis of MoneySavingExpert tweets general advice and also answers some personal finance questions- @MartinSLewis and @Moneysavingexpert
The Which? Money team (@WhichMoney) tweet smart money guides.