Leading investors and market commentators give some ideas for what income investors may wish to consider.
Investors looking for income have struggled in recent years. Interest rates are at record lows and many bonds now yield negative real returns.
The current economic fallout of Covid-19 only compounds this, with a slew once-reliable dividend payers announcing payout cuts or suspensions.
In such an environment, must investors just accept lower income or be prepared to draw on capital? Below, leading investors and market commentators give some ideas for what income investors may wish to consider.
The first comes from Liam Thomas, chief investment officer of the US Solar Fund. He argues: “Infrastructure assets can provide steady income due to long-term cashflows generated by providing essential services.”
He points out that infrastructure assets are less sensitive to the ups and downs of the economy, and therefore more able to keep paying income in a downturn such as now.
On top of this, infrastructure assets are benefiting from the current low interest rate environment. Thomas notes that most projects will make use a mixture of equity and debt financing. Low rates mean lower financing costs for this debt and therefore higher returns.
Unsurprisingly for the chief investment officer of the US Solar fund, Thomas suggests that solar projects are a good bet, arguing that they “can generate long-term cashflows.”
Thomas says: “Solar investments are well positioned in these volatile times and they benefit from an increased global focus on reducing carbon emissions. Renewables are expected to increase market share at significant rates in the coming years, already outpacing fossil fuels in terms of new-build generation.
“As the prices of photovoltaic panels and components continue to fall, solar becomes more competitive than other sources of new-build generation in many geographies.”
Rupert Robinson, managing director of Gresham House Asset Management, sticks with the renewable energy theme. Instead, however, he says investors should consider opportunities in “operational energy storage”.
He says: “Investing in operational energy storage is designed to offer investors a complementary route to renewable energy in facilitating the migration to a low-carbon economy, while hoping to deliver a higher yield than more established opportunities.”
Robinson argues that that too many investors have already sought exposure to the renewable energy theme through wind and solar generation companies, pushing yields down.
He notes: “The underlying projects are perceived to have low-risk revenue, underpinned by subsidies and contracted for long periods. Significant capital has been raised in this space, and share prices of these companies have appreciated materially, pushing down dividend yields.”
Robinson argues that energy storage systems are a better way to gain exposure to the increasing use of renewable energy; they usually have a target dividend yield of 7% per year.
Meanwhile, Darius McDermott, managing director of FundCalibre, argues that some bonds still offer attractive income prospects. He gives the example of GAM Star Credit Opportunities, a strategic bond fund.
McDermott says: “It invests in the junior debt and subordinated debt of investment grade companies. This allows the fund to generate a good income from the higher-yielding junior debt, while still keeping a high-quality portfolio.”
In particular, the fund is heavily invested in the debt of financial companies. The fund’s managers believe financials are a much safer bet than the market is currently indicating.
They point out that the high capital buffers involved in compliance with regulatory requirements have made financial businesses much safer.
Indeed, banks are currently offering generous yields. McDermott notes: “To give an example of a Barclays bond, its price was 109 and it went to 87 in March, yielding 6.5% forever or 9.7% to call. In an environment where interest rates are so low, this is huge.”
He adds: “This is where the team usually find the best opportunities – and never more so than today. They’ve gone as far as saying bank bonds are the bargain of the century and, let’s face it, it’s not often a bond manager gets that excited!"