The quest for income from your savings
James Rae, Investment Manager at Charlotte Square, Investment Managers, outlines how to supplement income through investments in today's economic climate.
Today we all face a conundrum. How do you generate a more attractive income from your savings, than that available from cash deposits, and also how to do this while providing a reasonable level of capital security?
When looking at the interest generated column in your next tax return, you could be forgiven for feeling slightly gloomy and following the Bank of England’s recent interest rate slash, the situation isn’t going to get better any time soon.
British savers are left suffering and younger generations are wondering why they should bother saving at all. Explaining the benefits of cash ISAs to our children is now met with a look of deeper cynicism than ever before!
The silent wealth destroyers
In addition, although worries over inflation are currently low, inflation’s threat to long term wealth remains. It is worth noting that since the Bank of England slashed interest rates to 0.5% back in March 2009 the average annual inflation rate has been 3.1%. During this period, if not safe in a tax-free vehicle, we have also been paying taxes. So where should savers go?
An era of safety first
Clearly the safest alternative to bank deposits, by covenant, as a source of income is gilts. However, the aftermath of the great financial crash has seen gilt yields tumble to a level that makes the returns less than attractive to individuals and corporates not constrained by banking and insurance regulations (where financial institutions are required to meet tough solvency ratios). Gilts have benefited from the environment of low and stable long term interest rates, but a ten-year government bond now pays 0.7% interest!
What else is out there?
We do feel that there are some alternative sources of income that can help without climbing too far up the risk ladder. An investment in an infrastructure vehicle can provide a yield of over 5% despite some of the underlying cash flows, in many cases, continuing to be backed by the government.
One example of this is the renewable energy sector, where the government is effectively subsidising around half the cash flow of many renewable energy vehicles. This subsidy is linked to inflation and is far superior to the income streams from either cash deposits or government securities despite the subsidy being government backed. In addition, these renewable energy vehicles continue to generate cash from selling electricity into the market as you would expect.
Another strong income generator is the commercial property sector, which has come under scrutiny, post Brexit, following the suspension of many open ended property funds. However, this isn’t 2008 when many property vehicles had a colossal amount of debt and rental yields barely outstripped the cost of borrowing. We feel that a lot of real estate investment trusts have very good dividend security at the moment as the cost of debt is low and rental yields remain at reasonable levels.
In addition, there are opportunities on the market that allow investors to play niche areas. One example is UK care homes which generate yields of close to 6%. With an aging population the need for modern care homes continues to grow and this again feels like an area where investors can obtain a good level of income without taking on too much risk.
There are a broad range of opportunities to supplement your income through various investments, but your quest for income is harder work than ever before.
The figures referred to in the article are correct as at 30 September 2016.
About the author
James Rae is an Investment Manager at ‘Charlotte Square’, an investment management boutique situated in the heart of Scotland’s financial centre and offering a highly personalised discretionary investment management service for a range of private clients, trusts, pension schemes, corporate funds and charities. He is a member of the CFA Institute and graduated with a BSc Honours in Accounting & Finance from Bath University. To find out more please contact JamesRae@charlotte.eu.com
About the company
‘Charlotte Square’ is a trade name of Raymond James Investment Services Ltd (Raymond James) utilised under exclusive licence. Raymond James is authorised and regulated by the Financial Conduct Authority. With investment, your capital is at risk. The price of investments and the income from them can go down as well as up and neither is guaranteed.
This blog is one of a series of articles from our commercial partners.
The views expressed are those of the author and not necessarily those of ICAS.