Tuesday 20 December 2016

Fixed Interest (Portfolio Buy)


December (2016) is shaping up to be a lot more jolly than November - the portfolio is up a couple of percent in the first half of the month. I'm also looking forward to the usual Santa rally in the markets. (In fact, you could probably make a case for just investing in December and cashing out afterwards!)

After a bit of profit-taking the DIY Income Investor portfolio has cash to invest. It's a mixed blessing, as it's all too easy to make silly investments at this time of year (well, any time of the year, really).

As usual, the first step in topping up the portfolio is to check the balance between the two main flavours of investment in this high-yield approach: dividend shares and fixed-income securities. Plus I need to keep an eye on the level of diversified ETFs, as - although they are in theory a 'safer' investment, they do not perform in the same way as directly-held securities

As it happens, I'm overweight in dividend shares - so I need to top up with something from the fixed-interest range.

It's worth recalling that although fixed-interest securities provide a more stable level of income than dividends, they are essentially a gamble on the level of inflation and the general interest rate level. If you are buying into an income stream when wider interest rates are rising, the price of the securities will generally fall.

So, the challenge is to find something with:
  • a good yield and 
  • an early redemption date
  • and the added possibility of capital gain. 

It's a tall order! But maybe Premier Oil's 5% 2020 retail bond (LSE:PMO1) fits the bill? It is currently trading well below par, giving a running yield of over 6%. What is more it offers the possibility of a 25% capital gain (at the current price of around 80p) if it is redeemed at par in 2020.

There's a risk attached, of course. The oil market has been a bit of a bloodbath recently and low oil prices could be a threat to Premier Oil's very existence. However, the recent up-tick in oil prices gives some hope that the company will survive until 2020. At least the Telegraph's Questor thinks so.

[Buy price: £0.795]

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.


  1. (at the current price of around 80p)

    Err did you get the price wrong? Looks like c £80 to me. Or am I missing something?

    1. Like many corporate bonds, the face value is £1 but they are only sold in bundles of 100. Confusing, isn't it?

  2. Err are you able to explain what the hell is going on at the moment to these bonds ? Very confusing. Some choice to be made about warrants and an increase to interest rate, but presumably being moved down the pecking order to get any money back if they go bust ? If you can explain it then it would make a great article but needs to be now because I am supposed to do something by 12:00 Monday ?!

    1. Thanks for reminding me. I've accepted whatever it is they are offering.