If ultra-low interest rates are bothering you, consider investing for income in your ISA or SIPP. In our latest blog, Award winning journalist Cherry Reynard looks a four investments that aim to pay a yield.
Investing for income: Get paid today without compromising tomorrow
The trouble with saving and investing your ISA or SIPP is that it lacks the immediate allure of, say, wine and holidays. It’s all about taking care of your future self, but that can leave your current self feeling neglected. By investing for income, you can keep both parties happy – jam today and jam tomorrow.
It’s worth noting that this isn’t as easy as it used to be. In the giddy days before the global financial crisis, Covid-19 and all the other crises inbetween, it was possible to keep your money in a bank account and earn 3-4% interest every year. It is still possible to generate this level of income, but you will need to broaden your horizons.
There are four ways to get investing for income: dividends from shares, interest from bonds; rental income from property; and ‘alternatives’, which is a catch-all label for everything from catastrophe bonds to peer-to-peer lending to solar energy.
1. Stock markets
If you own shares, you own part of a company. That entitles you to a share of the company’s profits, some of which will be paid out as dividends once or twice a year. One way to judge whether a company is likely to pay dividends is its dividend yield – this shows its historic dividend payments as a percentage of its current share price. For the FTSE 100, the dividend yield tends to be between 4% and 5%.
That said, investors shouldn’t make the mistake of thinking this is like the income from a bank account. Companies can hit tough times and there aren’t always enough profits to make payments to shareholders. The pandemic has forced many companies to cut payouts, even if some have bounced back relatively quickly.
The best way to minimise the impact of one company missing a payment is to hold plenty of them – collective funds focused on equity income blend a range of different companies. It is also worth ensuring that you are invested across a range of geographic regions; anyone who had been relying solely on the UK would have had a tough time through the recent crisis. Finally, make sure you hold a blend of sectors – some high-income companies can be in stodgy old industries such as oil and tobacco, so you need a balance in your ISA or SIPP.
Cherry’s stock market fund picks for your ISA or SIPP:
Bonds are loans to companies or to governments. You lend a company or a government a fixed amount, they pay you interest and pay the loan back at the end. The amount of interest you receive is based on the risk of the company going bust (think consumer loans, where higher risk borrowers need to pay higher rates). Although companies don’t go bust very often, you only need to look at the UK’s beleaguered high street to know that it can happen.
In days gone by, bonds were a useful source of income. The trouble is, with interest rates so low, many bond investments pay next to nothing. Often, if you want a higher income, you have to take a chance on a higher risk company. As with shares, diversification makes sense and a collective fund is usually a good option. Strategic bond funds allow the fund manager some flexibility and that can be useful at a time when bonds don’t look very exciting.
Cherry’s bond fund picks for your ISA or SIPP:
Not many people can afford to buy a multi-million pound office block, rent it out and draw the income. However, with a commercial property fund, you can pool your resources with other investors, own a little bit of a building and receive a little share of the rent. This has historically been another good option when investing for income. While there is a risk that tenants don’t pay, there are usually other tenants waiting in the wings.
However, commercial property hasn’t been a great investment through the crisis. Businesses have been in distress and plenty of them have put pressure on their landlords to drop the rent. However, there are unusual property options that have proved a better choice – warehouses, for example, that provide storage centres for online delivery groups such as Amazon or infrastructure funds, that invest in roads and schools.
Cherry’s property fund picks for your ISA or SIPP:
‘Alternative’ income options usually come in the form of investment trusts, which tend to be a better option for less conventional assets that may be more difficult to trade, but have some unusual features which can make them seem more complex (see Faith Archer’s blog on why she likes investment trusts). There are sound reasons for including this type of investment. Often the performance bears little relation to equity and bond markets, which can be useful at a time when stock markets are wobbly or bond markets look poor value.
If investing for income, interesting options include solar and wind farms, where investors can sleep soundly knowing that they are playing their part in saving the planet, while also bringing in a nice yield for your ISA or SIPP. Healthcare trusts, which may own doctors surgeries or other hospital buildings, have also proved a reliable source of long-term income. Importantly, they have also proved resilient during the recent crisis.