Investment View: Look to equities for income in era of low interest rates
L&G is about as solid and well run a company as you can find right now. Stick with it
James Moore is the Independent's Associate Business Editor and writes the Outlook City comment column from Tuesday to Friday. He also has a keen interest in disability issues and when not attempting to further injure himself playing wheelchair basketball.
Tuesday 04 December 2012
Finding a decent source of income in today's investment markets is about as easy as finding a Liberal Democrat voter in Rotherham. Interest rates remain at all-time lows, and they're unlikely to move anytime soon.
Meanwhile, bond yields are pitiful. Despite our huge national debt, you'll be paid less than 2 per cent for lending money to the British Government for 10 years. As for corporate bonds: when even a medium-sized company like Eddie Stobart can get away with offering a coupon of just 5.5 per cent to retail investors on a bond that will be redeemed in 2018, it tells you all you need to know.
Which leads us to the stock market, where big companies with stable dividends can offer some respite. Health warning time first, though. Shares put your capital at risk, and the stock market has been quite frothy this year. The global economy looks about as healthy as a 20-a-day smoker, and there is now a real risk of a fall in the coming weeks. That's not least because America's politicians appear quite prepared to jump off the country's fiscal cliff by failing to reach an agreement on its debt ceiling. Which will trigger an economically destructive package of tax rises and spending cuts. So be warned.
I last looked at yield on 17 January when my top tips for income were, in no particular order, Aviva, Legal & General (L&G), Icap, United Utilities and Shell. At the time L&G was yielding 6 per cent. It now offers a forecast yield of 5.2 per cent. The reason for the decline is that the share price has shot up by more than 20 per cent from the 112.6p it stood at then. Happy days if you bought in. The shares still provide a good income, and L&G is about as solid and well-run a company as you can find right now. Stick with it.
Aviva is a much more risky bet, with its big exposure to the eurozone. That is somewhat counterbalanced by a big and profitable general insurance business and a substantial capital cushion. Andrew Moss, the chief executive, was a casualty of the "shareholder spring" which saw multiple rebellions over bosses' pay, and an energetic new chairman has been shaking things up.
When last featured Aviva offered a yield of 8.84 per cent, and again that's declined a bit because of the shares' rising price (they've gained more than 10 per cent since I last looked, when they stood at 316p). A forecast yield of 7.5 per cent is still pretty impressive. There is a much bigger downside risk than with L&G, but one could view the shares as undervalued. Buy.
Shell is a loser in terms of share price, and is now about 9 per cent lower than the 2,258p it stood at when I last looked. The company offers a prospective yield of 5 per cent, about the same as in January. But the shares are cheaper to buy and, depressingly for the environment, oil looks a very good, long-term bet. Buy if your conscience allows.
United Utilities will, I think, face a lot of pressure from the regulators in the next pricing round. Its shares offer a similar yield (about 5 per cent) to what they offered on 17 January, but they've appreciated by more than 10 per cent from 610.5p. Book your gains and shift the money into National Grid. Its shares have also been on a tear, but they offer a prospective 6 per cent yield and rest on a lower earnings multiple.
Icap was at 326.5p when I last looked, and it hasn't found things easy, getting booted out of the FTSE 100 as the shares have fallen. Now is not a happy time for a company that thrives on trading activity and interest-rate volatility, but trading on just nine times forecast earnings and offering a prospective yield of 7.6 per cent it is looking undervalued. Icap can rise again.
I said steer clear of supermarkets back in January, but I've since changed that view. As recently highlighted in this column, Sainsbury's is a good bet in what (with a few exceptions) is just about the only part of the retail sector you'd want to be invested in. It offers a forecast yield of 5 per cent. Buy.
Others to consider: Vodafone, prospective yield of 7 per cent and undervalued shares; GlaxoSmithKline (GSK), 5.5 per cent forecast yield, and a consistent performer; Scottish & Southern Energy, steady and forecast 6 per cent.
Higher-yielding stocks to steer clear of: BAE Systems, which sought to respond to declining defence budget by pursing a vainglorious merger with the European aerospace giant EADS only to be shot down by the Germans (and its own shareholders). AstraZeneca, less diversified and far more reliant on blockbuster drugs that GSK. Inexpensive shares, but income-seekers beware. Resolution, created by the City entrepreneur Clive Cowdery as a vehicle to create a UK super-insurer. Hasn't lived up to the hype. Admiral, primarily a motor insurer, has struggled recently and regulators are probing the sector.
Finally, Royal & SunAlliance. Great yield (more than 8 per cent), but a personal issue with the company means I'm not able to offer an unbiased assessment.
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