Cherry Reynard from interactive investor 15th February 2022:
Four types of funds yield 5% plus. Cherry Reynard runs through the options, risks and potential rewards…
In general, there are four types of investment that generate a yield in excess of 5%. The first are conventional equity income strategies…
The second type of high-income fund operates at the farther reaches of the bond market – either emerging market debt or specialist debt strategies…
There are also specialist property funds…
The final area is ‘speciality finance’…
Sustainable income
High yields can arise where the share price has fallen significantly in anticipation of a dividend cut, but that cut has yet to be declared. The same is true with income strategies in the investment trust market. With this in mind, determining the sustainability of an income is vitally important and will vary with the type of income strategy.
Equity income has a tailwind today. There has been a widespread dividend revival…
Away from equity income, James Carthew, head of investment company research at QuotedData, says that many of the high yield options in the investment trust sector should be sustainable, but advises caution on the very highest yields. He says: “There are trusts paying 12% to 13% yields, but these are invested in complex debt funds, which are often quite risky. These have performed fine because there has been a lot of support for businesses, but we might see more defaults if the environment becomes more difficult.”..
Some of the property funds on the highest yields are also struggling, he says, particularly those with large weightings in regional offices. Carthew is far more optimistic on the prospects for the various infrastructure, solar and wind options.
He says: “Inflation helps the subsidies, and cash flows are index-linked as well. It is interesting how much the power process has moved.”
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