Selecting the stocks
The pool of stocks that I ended up fishing in is not high-yielding “recovery stocks;” they seem too risky for this fund. This ruled out banks such as HSBC, oil companies, or the fund management houses. Instead, I was looking for a steady dividend flow, which is not obviously at risk. Quarterly instead of half-yearly dividends is a bonus but not essential.
With the criteria that I listed above, it is relatively easy to analyse a database of listed stocks and select a diversified set so as to create the holding fund. Because I regard that as a fairly systemised approach and one in which I can add little value to the readers, I am, instead, setting out below some lesser-known debt and infrastructure companies, although my secure income fund is not limited to these.
Now, obviously, none of these are without risk, but the ranking in the risk order is significantly below that of a typical equity, having relatively secure cashflows security over assets or income flows. Essentially what I am doing is relying on the continuation of the policy of quantitative easing and low interest rates by the central banks. As we have seen, central banks rapidly respond to any disruption in the business sector (e.g. most recently, on the Brexit vote by the Bank of England) by implementing further measures. While central banks have relatively little influence over profitability of businesses, they do restore value to secure income (most obviously in government bonds) and that is the area in which my defensive stocks are placed. Currently, the stocks from which I select include:
- 3i Infrastructure invests in infrastructure, but the yield is now only 3.8 percent, reflecting its recognised growth potential and recent price rises.
- HICL is perhaps one of the safest stocks (compare the quick recovery from the relatively modest falls around 2009), with the potential for some index-linked growth should inflation rise. The yield has, however, gradually dropped over the years and is now 4.4 percent.
- John Laing Infrastructure is similar to HICL, although perhaps not quite as good a performer, but with a higher yield of 5.2 percent to compensate.
- International Public Partnership invests in debt and equity, and in the U.K., Europe, Canada and Australia, but with a yield of only 4.3 percent
- The Renewables Infrastructure Group Fund has onshore wind projects and PV projects in the U.K., France and Ireland. It is currently yielding 6.1 percent and aims to grow its dividend in line with inflation (it is likely that post-tax returns from similar investments held in a VCT will be higher but, of course, without the liquidity).
- Greencoat UK Wind invests in the U.K. wind farms, reinvesting surplus income. The dividend is 5.9 percent, which is intended to be grown in line with inflation
- Starwood European Real Estate Finance invests in senior, junior and mezzanine debt secured on commercial property. The overall LTV is at or below 70 percent, which provides a safety margin and the managers have been quite selective on the security for the loans. Its yield is 6.2 percent.
- ICG-Longbow Senior Secured UK Property Debt yields 5.9 percent from senior debt investments secured predominantly against the U.K. commercial property investments with an underlying target portfolio IRR of 8 percent, although the company has struggled to maintain or improve its pricing in recent months, suggesting that it is now at a discount to NAV
- Real Estate Credit Investment invests in senior, junior and mezzanine debt secured on commercial and residential property, as well as CMBS and RMBS, producing a weighted average yield of 11.7 percent—a large loan was recently repaid—with short maturities. It has a dividend of 6.5 percent
- Ranger Direct Lending invests in debt instruments originated by peer-to-peer lending in a range of sectors. It has a target return of 12 percent-13 percent (ungeared), but only yields 5.3 percent and is now trading at a significant discount to NAV
- Volta Finance is an unusual debt investment company (including corporate credit, residential and commercial mortgages, auto and student loans, credit card and lease receivables), run by AXA in Paris. It typically produces double-digit total returns and has an 8.7 percent dividend yield.
- CQS New City invests in high-yielding bonds of mainly quoted companies as well as convertibles, equities and preference shares. With a yield of 7.8 percent, it typically trades at a small premium to NAV. This seems to be a better proposition than the LSE ORB market.
- Primary Health Property REIT yields 5.4 percent and invests in local GP surgeries, etc., with potential for growth in rental income over time.
These are obviously brief summaries of the activities and profiles of the companies, and there are important issues that I have been obliged to omit for lack of space, so readers will need to do their own research. Note that these yields will fluctuate to reflect cum and ex-dividend changes, but are correct at the time of writing.
Finally, as I hope that I have emphasised, there are advantages and disadvantages to my approach. I still keep a large proportion of my capital in cash at my broker, ready for that unexpected turn in the market or the under-priced growth stock. It is also my real “emergency” money.
Diana Patterson started her career as a student nurse and, after qualifying as a staff nurse, became a ward sister. After a further two years of full-time study, she qualified as a tutor and examiner by the age of thirty. Seeking another challenge, she studied for a degree in law while still working full time. After subsequently qualifying as a solicitor, she practiced in Central London in residential and commercial property and probate. Her main interest outside work was trading in the stock market, with an intention to becoming financially independent. As soon as her portfolio returns exceeded her earnings in the day-job, she decided to invest full time. This was facilitated by the advent of the internet and the increase in freely-available information. She adopts a counter-intuitive approach, using her training in psychology, and believes that 2008 was the opportunity of a life-time. She has survived three bear markets and is in the process of assessing whether the Referendum will offer another such opportunity. You can contact her via Twitter at @DianaEPatterson.