After a headline ‘credit crunch’ over the summer, you might have thought it would have become easier to get a high rate of income.
Not so. Our new Income Portfolio can only just get 5.5%. The shenanigans in the financial markets did result in prices falling for riskier fixed interest investments.
But not many investors will be keen to risk their retirement with this stuff. So our Income Portfolio - intended as a long-term source of income for people in retirement - includes only a small amount of ‘high-yield bonds’, paying an 8% income.
Here’s how to use our Model Portfolios
Rising share prices means lower yields
But, on the other hand, stock markets have bounced back from their summer setback, so income from shares is even lower than it was a year ago.
That means our balanced Income Portfolio, with just over half the money in bonds, earns an average income return of 5.5% which means 4.6% net of standard rate income tax. If you haven’t used your ISA allowance, though, you can avoid most of the tax by holding the fixed rate investments in an ISA where it’s tax-free.
The original Income Portfolio has been a dull performer compared with our growth portfolios, which is as it should be. Over the past six months it’s lost a few hundred pounds, over the past 12 months it’s made a few hundred pounds.
Order free information on top savings plans here
The income imperative
Our aim is to include enough investment in assets like shares and property to ensure that the income rises in future years to offset inflation. Ideally, we’d like to have more than the actual 38% in shares and 10% in property, but these investments pay lower rates of income, and to get to 5.5% before tax we have to have 53% of the capital in fixed rate investments.
| Investment | Amount | % of total | Gross yield | Net income |
| Three year fixed rate bond | £2,000 | 10% | 6.3% | £101 |
| Aegon High Yield Bond | £2,500 | 12.5% | 8.1% | £162 |
| New Star High Yield Bond | £2,000 | 10% | 6.4% | £102 |
| Invesco Perpetual Monthly Income Plus | £2,000 | 10% | 5.2% | £83 |
| New Star Managed Distribution | £2,000 | 10% | 5.3% | £85 |
| F&C High Income | £2,000 | 10% | 7.2% | £115 |
| Skandia Property | £2,000 | 10% | 3.8% | £76 |
| Artemis Income | £2,500 | 15% | 3.4% | £85 |
| Schroder Global Equity Income | £3,000 | 15% | 4.0% | £120 |
| Total | £2,000 | 100% | 5.5% | £929 (4.6%) |
Income data as at 15/10/2007
Juggling the investments To meet the income target today we’ve had to make a few changes to the investments. We’ve dropped Fidelity Income Plus and JPM Global Equity Income, and replaced them with two higher-yielding funds, Artemis Income and Schroder Global Equity Income.
We’ve replaced Framlington Pan-European Bond with New Star High Yield Bond. And we’ve added New Star Managed Distribution, which wrings a 5.3% income out of a mixture of share and bonds.
The best performer over the past year, surprisingly, has been F&C High Income, which holds a mix of shares and fixed interest and boosts the income by selling options on its shareholdings.
The worst performer in the past six months has been Skandia Property, because the share prices of property investment companies have taken a bashing. As a long-term holding to generate rising income, though, it still makes sense so it keeps its place in the portfolio.
Here’s how to use our Model Portfolios
There may be better times ahead
Over the past two years, I’ve been gloomy about fixed interest markets because rising inflation was pushing interest rates upwards. But the picture has now changed.
The credit crunch over the summer caused economists to predict that the US economy would get weaker, so the US Federal Reserve cut interest rates last month, and analysts expect the Bank of England to follow suit soon.
Falling interest rates are good for fixed interest markets, and investors in this sector can expect better returns in 2008 unless inflation suddenly picks up again. There’s certainly a strong argument that income investors should switch capital from variable interest accounts to fixed interest to get the benefit of locking in today’s high rates while they can.
Order free information on top savings plans here
Important Notice and Risk Warning
The EveryInvestor Model Portfolios are for general guidance only and do not constitute a recommendation for any investor. EveryInvestor does not provide individual investment advice.
Your own personal circumstances and tax position must be taken into account in selecting investments. We recommend that you obtain advice from an independent financial adviser before making investment decisions.
The value of your investment and the income from it can go down as well as up and you may not get back a significant proportion of your investment. Past performance is not an indication of future performance.
