The generosity of the Taxman is due to an investment in a SIPP (Self-Invested Personal Pension) for my non-working spouse. Very kindly we are given £720 for saving £2880 in the SIPP - this represents an immediate 25% return! Not a bad start. But what to invest in, with Europe crashing around our ears?
The DIY Income Investor approach is based on obtaining the highest yield on our savings and investments, consistent with safety of capital and income. To obtain the best returns we DIY the investment process and try our utmost to avoid paying tax. We also diversify to reduce risk.
The main asset classes used in this approach are the layers of the Income Pyramid:
- cash bonds
- government bonds (gilts)
- high-yield dividend shares
- fixed-income securities, such as corporate bonds, preference shares and PIBS
- ETFs of the above asset types
In terms of the portfolio balance we are aiming at around:
- 40% cash
- 30% dividend shares
- 30% fixed-income securities
The level of cash you hold will be determined partially by holding onto a solid 'emergency fund' to pay for any unforeseen expenditure plus as much cash as you can hold without paying tax on it.
At the moment we are about equally invested in shares and fixed-income, so there is potentially a lot of choice for the SIPP.
The first place I look for investment ideas is the existing portfolio itself, to see if there are any investment that are performing well that I could add to. I don't like to hold more than 5% of the portfolio in any one security - so that implies over 20 holdings. All my existing fixed-income holdings are 'overweight', so I don't want to add to any of them.
That leaves 'underweight' high-yield dividend shares and the current best performers, in terms of yield, are:
- First Group (FGP): yield 13+%, although future conditions look difficult
- Chesnara (CSN): yield 10+%
- Resolution (RSL): yield 8.6%
- Aviva (AV.): yield 9+%
- RSA Group (RSA): yield 9+%
This is a pretty strong group of high-yield shares, although there is an obvious concentration on the insurance sector. The only 'diversifier' is First Group, which is unfortunately looking a bit shaky at the moment.
I am also 'underweight' in Standard Chartered 8.103% Perpetual (ESC6) (a corporate bond without a maturity date), currently yielding nearly 8% (with a slightly lower gross redemption yield).
Possible New High-Yield Dividend Shares
Using the links in the Toolbox page (on the Tab above) we can look at the top yielders in the FTSE 350. This throws up some of the riskier shares yielding over 10% (e.g. MAN, CWC, HOME) plus some of the shares I already hold. Then there are some new high-yielders:
- Homeserve (yield over 8%) - but their shares have slumped following an FSA investigation and are down over 40% in the last month; forecast yield and dividend cover are comfortable
- Halfords Group (yield over 10%) - who I've noticed advertising on TV recently and who have been buying their own shares; however, the dividend coverage looks low (forecast below 1.5), implying that a dividend cut may be on the way
- Cape (yield nearly 6%) - their shares recently took a hit from a major Algerian project and are down over 35% in the last month; it has a new chief exec and the dividend cover is very comfortable - forecast at 2.7
So, that's a couple to check out in more detail.
Possible New High-Yield Fixed-Income Securities
Again, the Toolbox page gives a number of sources of information on gilts, corporate bonds, PIBS and preference shares.
Perpetual UK Gilts are yielding only 4% - although this is a relatively 'safe haven' you are going to struggle to keep up with inflation with these. So, no thanks.
On corporate bonds, the most attractive yields available on new securities (i.e. not already held in the portfolio) are:
- HSBC Capital Funding (EHS5) is a perpetual corporate bond yielding over 8% (with a slightly lower gross redemption yield)
- AXA 7.125% 2020 (EAX0) is yielding over 7%
For preference shares:
- R.E.A Holdings 9% Net Cum (RE.B), operating in Indonesia, managing oil palm plantations and open cast mines and yields over 8%
- Ulster Bank 11 3/4% Sub Bonds (FAP) has a good yield - but is a subsidiary of the Royal Bank of Scotland (which is perhaps a two-edged sword: RBS is supported by the UK government but needing to sell some of its operations to fill a financial black hole); Ulster Bank has apparently been a 'profound' problem for RBS; there may also be 20% tax deducted at source by the Irish tax authorities and the sell/bid spread is wide.
- Leeds 13 3/8% PIBS (LBS) yields over 8%
- Skipton 12 7/8% PIBS (SKIP) yields over 8%
This quick overview of potential new investments shows - hopefully - that, despite a torrid month for stock markets (or perhaps because of it), there is no shortage of attractive yields available for dividend shares as well as many types of fixed-income securities. Before selecting any of them a fair bit of DIY research will be needed.
Watch this space!
(And let me know what you think about these choices.)
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.