For income investors, finding a decent yield has become harder and harder over the past decade. After the global financial crisis, when interest rates were slashed, cash savings accounts fell from paying over 5% to 0% in many cases. Even the best fixed rate Cash ISAs are paying less than 1% today*.
With government bond yields now as low as 0.9% in the US** and 0.2% in the UK**, and global corporate bonds on average paying 1.34%**, investors have been pushed further and further up the risk scale to find income, only to experience a further blow last year when dividends on shares were cut around the world. So where should investors now look for income?
There are a few options left open for income investors, but selectivity is key - and remember, the yields will fluctuate.
Global high yield bonds are yielding 4.5%** on average. But with lockdowns still a part of life for the first 3-6 months of 2021, there is the risk that companies default on their loans, so investors need to pick bonds carefully.
Funds to consider from the Chelsea Selection: Baillie Gifford High Yield Bond, Man GLG High Yield Opportunities and Royal London Short Duration Global High Yield Bond
Global high yield bonds, whilst higher up the risk scale, are arguably at least paying you for that risk - emerging market bonds are only yielding 3.5%** on average - so again you need a manager who can find the best opportunities for you.
Funds to consider from the Chelsea Selection: M&G Emerging Markets Bond, Nomura Global Dynamic Bond (a strategic bond fund, currently with a number of emerging market bonds in its top ten***) and Jupiter Strategic bond (also a strategic bond fund, currently with 31% in Asia and emerging market bonds***).
Then there are the companies that are still paying dividends. While many payments have been slashed as a result of lockdowns, enough companies have been able to maintain their payouts to keep the UK market's dividend at around 3% - far lower than previously, but still one of the best in the world. And although they've had a tough year, currently two-thirds of equity income funds are paying a 3.5% yield or more^.
Funds to consider from the Chelsea Selection: Artemis Income, LF Gresham House UK Multi-Cap Income and Man GLG Income
Another alternative is to look overseas. Although dividends have been cut all over the world and most other markets yielded less than the UK to start with, some countries have fared better than others in terms of companies maintaining their payouts.
Funds to consider from the Chelsea Selection: Guinness Global Equity Income, M&G Global Dividend and TB Evenlode Global Income
There are also some funds whose managers will enhance the yield for investors by using ‘call options’ to increase the income. They basically agree to sell some company shares at a set price in the future and get a fee in return. If the agreed price is less than the shares are worth, the manager loses some of the capital gains, but still gets the fee. So capital gains are likely to be lower, but income higher - more than 6% in most cases at the moment.
Funds to consider from the Chelsea Selection: Fidelity Global Enhanced Income is the only fund of this type on the Chelsea Selection. Other examples available on the platform include Schroder Asian Income Maximiser and Schroder Income Maximiser
Specialist areas like infrastructure and property shares also have decent income stream. While the property sector has faced a number of challenges in lockdown, rental collection in a number of subsectors has held up. Infrastructure is set to benefit from governments around the world 'building back stronger'.
Funds to consider from the Chelsea Selection: VT Gravis UK Infrastructure Income and Premier Miton Pan European Property Share
Some investors may prefer to outsource the hunt for income to a professional investor. In this case, a multi-asset income fund is an option. The idea of this type of fund is that a manager will adjust the asset allocation depending on the prevailing market environment and the options available.
Funds to consider from the Chelsea Selection: Artemis Monthly Distribution and, from the VT Chelsea Managed range, the VT Chelsea Managed Monthly Income
*Moneysupermarket.com, 11 January 2021
**Source: T. Rowe Price market dashboard, 31 December 2020
***Source: Fund factsheet, 30 November 2020
^Source: FE fundinfo, 11 January 2021
Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. The views expressed are those of the author and do not constitute financial advice.