Investment View: If you're seeking income, start with the Footsie's top-yield shares
With interest rates in much of the developed world close to or at zero, holding money in cash is a recipe for penury.
Bonds aren't much better – those that look low risk (like British gilts and maybe German bunds) provide pitiful yields. Cracking rates of return can be obtained from, for example, Italian or Spanish debt. But betting one's personal wealth on them – even if Standard & Poor's still rates them as investment grade – is another matter entirely. They make the stock market look like the epitome of safety.
They do offer a lesson for investors though: both give stonking yields and that is because they are risky. The yields come at a price: you could lose your capital.
The same is true of some of the top-yielding shares.
With the help of Thompson Reuters, I looked at the top-yielding shares from the FTSE 100, which, with bigger, more established and (hopefully) safer companies than the second-tier FTSE 250 or anything beneath it, should be the starting point for those who are seeking income.
Hedge fund manager Man Group offers the best prospective yield (based on next year's forecast earnings) on the index – a stunning 13.4 per cent – but illustrates the point about yields: some are high because the entity that offers them is doubted.
Man's yield doesn't look sustainable because its benchmark AHL Diversified fund hasn't been performing well. The City fears its investors will up sticks and Man will struggle over the next few years.
Those willing to speculate might see some worth in gambling on shares that now trade close to 11-year lows. Income seekers should avoid. Anything offering 10 per cent (or something close to it) has to be handled with care.
So what of insurer Admiral, yielding 9.1 per cent? This column said sell in March and that proved to be the right call.
A profit warning has called into question Admiral's much-vaunted underwriting, and personal injury claims are rising. There might be an argument for buying the shares if the group's founder, Henry Engelhardt, can steady the ship (he needs to). After all, profits haven't evaporated, they're just growing more slowly. Trouble is, a first profit warning is often followed by a second, and frequently a third.
Royal & SunAlliance might just be the safer bet. It too faces numerous issues but feels much more solid than Admiral while offering a a similar yield.
In the life sector we'd recommend Aviva. There are questions about management, and the group would be worth more broken up than it is as a conglomerate. But it is financially strong, and fears over its Italian business are overstated. Buy for the 8.84 per cent yield. The shares are cheap.
Those with concerns about Aviva could do worse than Legal & General (6 per cent prospective yield) which, while it is hunting for a new chief executive, is stable, financially strong, and has nice growth prospects to add to that income.
Icap, the broker, has taken a bit of a buffeting, but Michael Spencer, its founder, is a rare chief executive – he's worth the money.
Trust him to keep the company healthy enough to maintain a 6.4 per cent yield, not least because much of his personal wealth is tied up in the business.
Utilities and energy firms at the top (Scottish & Southern Energy, Centrica, United Utilities and National Grid) aren't necessarily cheap on earnings multiples and are under pressure over price from regulators. Of them, water operators look preferable, given they have at least achieved a settlement with their watchdogs.
So at 5.5 per cent United Utilities is worth a look. Shell, at 5.1 per cent, also looks a safe bet given global demand for oil.
However, while the supermarkets (and Marks & Spencer) might generate good cashflows to back their divies, the consumer squeeze makes them best avoided. It might also be best to duck commercial property companies such as Capital Shopping Centres and British Land. Avoid BAE Systems, too. It is threatened by cutbacks.
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