Tuesday 17 April 2012

Another 10% Yield!

Most UK DIY Income Investors will be thinking about where to invest their new ISA contribution (of £11,280, if you can spare that much).

We're after high yield, consistent with a reasonable level of risk (so not too many eggs in the same basket). In particular, it would not be nice to lose our capital. If you have worked your way up the Income Pyramid (and therefore have a foundation of low-risk investments), you will be able to target some of the highest yields around - like this with a yield of around 10%.  There is some risk - but hopefully not too much.

For this kind of chunky yield it might be work looking at Newcastle Building Society PIBS (Permanent Interest-Bearing Shares). They're called 'shares' but they are more like corporate bonds.

There are two flavours available, both 'perpetual' (i.e. without a call date):
  • 10 3/4%: current yield 9.6% (109p)
  • 12 5/8%: current yield 10.7% (118p)

Both are available in retail-friendly £1k lots. The price has being going up recently, shaving down the yield. Personally, I'd stick with the one with a price nearer to the 'par' value, just in case they decide to 'call' them in future (due to changes in solvency regulations).

So, why the high yield? Well, the Newcastle Building Society has not been doing too well recently and the market is obviously worried about its financial health. Indeed, the 2011 annual report was a bit lacklustre but by no means looking like a financial institution on its last legs. If anything, if the property market picks up the picture may well start looking rosy. But for the moment it is still making provisions (£12.3m in 2011, eating up all their operating profit - and more).

If it does hit the buffers, any money in PIBS might well go up in a puff of smoke; although you don't hear about many Building Societies going bust...

Worth a punt (for an investor with a mature portfolio)?

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.

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