Saturday 20 October 2012

FTSE Dividend Yield vs Gilts - The Circle Has Turned

Swings and roundabouts
The yield on UK gilts - government loan stock - sets a 'risk-free' baseline for the financial markets: 'risk-free' in the sense that default risk (the risk of losing your money) is close to zero, although inflation can always erode the capital value of fixed-interest securities (i.e. excluding inflation-linked securities).

By contrast, yield from dividends is usually seen as having a risk premium because you can quite easily lose some - or all - of your money. And pension funds, in particular, have to look at risk very seriously.

What is perhaps surprising is that this dividend risk premium is now positive and is at a generational high - with dividends now paying a premium over gilt yields last seen in the early 1950s. And bear in mind that Mr Market's memory usually only goes back a year or two!

Friday 19 October 2012

The Importance of Reinvesting Income

As a DIY Income Investor you generate income - and you reinvest it, don't you, rather than spend it?

After all, this seems to be the way to become wealthy over time. And if you don't believe me, take a look at this study...

Thursday 18 October 2012

Portfolio Buy: State Bank of India (UK) Savings Bond 4.5%

Managing your cash is a key skill. Debt is not allowed in the DIY Income Investor approach, so you need cash (i.e. rather than credit) for day-to-day expenses and for longer-term purchases or one-off costs, for which you will need an appropriately-sized 'emergency fund'. 
A further role of cash is as a 'risk-free' income investment (as long as you can keep ahead of inflation) - perhaps while you wait on the sidelines until the financial markets settle down (will they ever?).

Friday 12 October 2012

A Nation of Financial DIY?

There's no 'free lunch' - well, not usually, that is. Whenever I am offered something, I always think: who's paying for this? Why am I being offered this? Is it likely to be to my benefit or someone else's?

This might seem like jaded and cynical thinking - but in the area of investing it is probably good practice.

And many investors are about to find out that what they thought was maybe free, wasn't.

Tuesday 9 October 2012

The Rise and Rise of Sainsbury

It is satisfying when one of your investments performs well. But what should you do then? Just sit back and enjoy the warm glow?

The DIY Income Investor approach is usually a 'buy and hold' strategy - but, in my view, there are times to think about selling.

My holding in Sainsbury, which was providing a good yield has been showing a consistent increase in share price over the last few months and is now showing a nice capital gain. Should I realise the capital gain or just continue to hold?

Thursday 4 October 2012

Portfolio Buy: Provident Financial 7% 2020

The search for yield in the UK is getting harder and harder. Perhaps this is a good thing, as it implies that market risks are seen as falling, as well being a result of governments around the world pumping money into governments stocks (and reducing benchmark 'risk-free' yields).

This has impacted yields on corporate bonds, where there are few attractive yields remaining. One of the more reasonable long-term corporate bond options is the Provident Financial 7% 2020 bond (i.e. 7% coupon, maturing in 2020). But buying any long-term bond has its risks - how does this bond measure up?