How fund managers look for reliable income
The quest for income is a challenging one in an environment of low interest rates but there are still plenty of assets which offer an attractive and reliable yield.
In this article we take a look at where some of the experts are finding income opportunities.
A DIVERSIFIED APPROACH TO FIXED INCOME
The £170m Henderson Diversified Income (HDIV) has a flexible mandate to generate a high level of income with long-term capital growth, primarily by investing in bonds.
The profile of its typical shareholder is a retiree in their 60s relying on the fund for income, which pays a quarterly dividend.
In the 12 months to 31 December 2019 the fund’s share price was up 23% while the underlying net asset value (NAV) advanced 16%. The fund has a 4.6% dividend yield.
Rather counter-intuitively the Janus Henderson trust looks at companies in the same way that an equity fund manager might if they invested with a ‘quality’ style. It calls the approach ‘sensible income’, that is to say a focus on non-cyclical businesses producing strong free cash flow.
For example the managers like recession-proof industries such as animal health where according to the American Pet Products association ‘millennials plan to spend more on dogs over the course of their pet’s lifetime than they do on their own health care’.
LONG-TERM INCOME FROM INFRASTRUCTURE
The £579m JLEN Environmental Assets (JLEN) offers a yield of 5.7%, derived from owning and operating infrastructure projects that have an environmental focus.
The shares have delivered a total return of 10.6% over the last 12 months. The NAV total return came in at 5.6% and the trust trades at a 13.9% premium to NAV. The dividend has grown by 2.7% a year since 2016.
The trust’s manager Foresight targets annual returns of 7% to 9% which includes dividend yields of 5% to 6%. The portfolio is diversified across five different technologies encompassing wind, solar, anaerobic digestion, waste and waste water, and hydro.
For those investors interested in the trust’s green credentials each of the portfolio’s 31 assets are independently assessed by Aardvark Certification, a specialist audit and certification body for carbon, energy and waste.
In its past half-year period the fund’s holdings recycled 63,853 tonnes of waste and diverted 233,082 tonnes from landfill sites.
QUALITY AND INCOME
The £87.6m investment trust Shires Income (SHRS) has a dividend yield of 5% and describes its investment objective as providing resilient income with potential for growth.
The manager attempts to provide a differentiated strategy which includes investing in higher yielding preference shares, holding some overseas shares and investing in the Aberdeen Smaller Companies Income Trust (ASCI) for access to high growth companies.
Preference shareholders are entitled to a fixed dividend which takes priority to that paid to ordinary share dividends and therefore tend to be more stable.
Fund manager Iain Pyle is backed by a well-resourced UK equity team giving full coverage of the FTSE 350 and extensive company contact.
Rather than just focusing on higher yielding shares the manager focuses on high quality stocks with above-market yield or with the potential for dividend growth.
The £630m Civitas Social Housing (CSH) REIT is a relatively new kid on the block dedicated to investing in social care housing.
It is the UK’s largest provider of accommodation to tenants with learning disabilities and mental health disorders. The shares trade at a 9.9% discount to NAV and offer a dividend yield of 5.4%.
The discount has narrowed appreciably from almost 21% last summer when there were concerns some housing associations had run into financial difficulties, but these issues have since been addressed.
The company owns 608 properties across the UK rented out to local authorities on 20-year leases.
Recent first half results (2 Dec) showed earnings up 42% to £14.3m and the firm has identified a pipeline of more than £200m properties to add to its diversified portfolio.
Famed investor Warren Buffett, said in a recent interview that banking shares were very attractive compared most other securities he was looking at.
One way of getting exposure to a diversified global financials portfolio which also offers a decent 3.3% dividend yield is the £300m Polar Capital Global Financials (PCFT) investment trust. Since launch in 2013 the trust has achieved an average return of 10.3% a year which includes dividend growth of 7.5% a year.