| Cashing in some chips Source |
The current turmoil in the financial markets is a sign that things are changing - and one of those changes is, I believe, anticipation of the economic landscape without Quantitative Easing (QE) and its variants around the world.
For a yield-oriented DIY Income Investor this presented a conundrum.
Flooding the government bond markets around the world with central bank money has resulted in a fall in yields in these securities, with the knock-on effect of increasing the attractiveness of high-yield fixed-income securities. The unwinding of QE is likely to have the reverse effect.
Now, this is not going to happen for a while but the market is - in my view - beginning to anticipate the potential impacts. So it might be time to cash in a few chips.
The Lloyds preference shares that I picked up for 74p-odd early in 2012 (due to the perceived shaky financing of Lloyds) are currently selling at 98p - an increase of one-third. Lloyds has been going gangbusters in recent months, selling of parts of its (overgrown) empire to strengthen its financial position in the UK. The share price has currently reached the 'break-even' point for its UK government backers, signalling a potential end to its crippled life as a client of the Treasury. (And, whisper it, reinstating the dividend?)
It doesn't look to me like it could get much better.
As a result of the price changes, the yield on these preference shares has fallen from 9% when I bought to around 6.5% at sale (around the benchmark for this type of security).
The conundrum that I faced ran as follows:
- 9% was/is a pretty good yield on the original investment - better than anything I can get now
- even 6.5% is pretty good going forward
- then why sell?
- the price has gone up by a third (the equivalent of around three years' income)!
What was/is the right thing to do, given that I expect fixed-income yields to fall in the near future?
The answer took a surprisingly long time to rationalise: I'm an Income Investor, so It's About the Income, Stupid. The yield is only a comparative guide between different asset classes.
Whatever price I paid for it, I would continue to receive the same income if I held on. If I am expecting the price to fall, I can sell now and repurchase a greater number of securities of the same type later and receive a bigger income.
It's as simple as that. Or so I'm hoping.
[Sale price: £0.98625]
I am not a financial adviser 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.
Very well thought through!
ReplyDeleteI believe I will follow your lead with a few of my prefs.
Interesting rationale for selling. It is always so tricky when the price has gone up so much!
ReplyDeleteI'd be interested to hear more about what effect you think the withdrawal of QE will mean to the high yield equity markets here in the UK.
A mass sell-off of the government's 33% stake in Lloyds Banking Group has moved a step closer after the management of the bailed out bank was asked by UK Financial Investments, which looks after the taxpayer's shares.
ReplyDelete