Thursday 23 June 2011

Portfolio Buy: Nationwide PIBS 7.5%

As described In a recent post I have now completed the investment of our family's annual ISA allowances, with the emphasis - not surprisingly for The DIY Income Investor - on income.

Two purchases were high-yield dividend shares in sectors unlikely to be hit by the ongoing consumer spending decline (see here and here). The final investment is a novelty for me - a Permanent Interest-Bearing Share or PIBS issued by the Nationwide building society.

 I have examined PIBS as a potential investment in a previous post. They are special shares issued by building societies that pay a fixed rate of interest. They cannot (usually) be sold back to the society but can be bought and sold on the stock exchange, which means the price varies. A PIBS is usually pays interest 'permanently', unless:
  • the issuer cannot afford it (there have been recent defaults, including, unfairly for UK investors, the current case of The Bank of Ireland PIBS)
  • the issuer 'calls' the PIBS, in this case potentially in December 2021.

A PIBS is similar in character to a Corporate Bond and therefore forms part of my Level 7 holdings on the DIY Income Investor Income Pyramid - the most risky tranche of investments.

The annual interest is 7.25% (paid in June and December), giving me an income yield of 7.7%. What is more, as I bought it at a 5% discount to the cover price, I would make a small capital gain in 2021, if the PIBS were to be called.

This is, in fact, a rebranded Portman PIBS, the original issue document of which noted, helpfully: "The PIBS are subordinated to all other liabilities of the Society. In a winding up or dissolution of the Society, the claims of the PIBS holders will rank behind all other creditors of the Society and the claims of Members holding shares (other than deferred shares) as to principal and interest. Investors should be aware that this subordination is a primary factor behind the higher interest rate that is paid on the PIBS when compared to other investment products of the Society i.e. that there is a direct trade-off between higher interest and higher risk."

This is Money publishes a weekly summary of rates of return offered by PIBS, showing a number of PIBS on offer around this level of yield - although not all are available through all share-dealing services. 

Overall, I am looking for good, sustainable yield with a reasonable level of risk and I am looking for sectors that will have some resilience. I have to hold my hand up straightaway and recognise that housing is a not a 'safe' sector at the moment. There is an threat of an imminent increase in the Bank of England base rate, on which many building society 'standard' rates are based. This may push many mortgage-holders over the edge and lead to increasing repossessions. However, there is still a market for competitively-priced properties and the Nationwide is the biggest UK mortgage lender - so it has the resources to weather any short-term storm. 

So I hope that I have bagged a good long-term return, although in potentially a risky part of the economy - what do you think?

I am not a financial advisor and the information provided does not constitute financial advice. You should always do your own research on top of what you learn here to ensure that it's right for your specific circumstances.

1 comment:

  1. I also hold NW PIBS and see them as a real, solid backbone to an income portfolio. PIBS seem to offer good value too, given that they are not usually on the radar of most DIY investors.