Generating income

Newton Private Investment Management
January 2010

• UK government bonds ('gilts') present one such option although, given the rise above 'par' value in gilt prices, any income benefit is largely offset by the erosion of capital. For example, the Treasury 4.75% 2030 is currently priced at £104.3 and offers an income yield of 4.6%. When the ultimate fall in capital value (i.e. to £100 in 2030) is factored in, the 'gross redemption yield' equates to 4.4%.
• For investors with a greater appetite for risk, another option to consider is corporate bonds such as those recently issued by QBE Insurance. The bond is scheduled to mature in 2015 and has a redemption yield of 5.2%. While corporate bonds are more risky than gilts (it is possible, though unlikely, that QBE may fail to repay the bond in 2015), a fund of diversified corporate bonds is a good way of investing in this asset class. Newton has designed such a fund specifically for our private clients; it has a current yield of 6.9%, and aims both to preserve capital and to generate a healthy income.
• Finally, for those investors willing to tolerate a much higher level of risk, dividends from equities offer income greater than cash and the likelihood of a rising level of income over time. The increase in risk must be considered carefully. However, for those who wish to invest in equities, Newton has a range of funds that generate a high and generally rising income stream combined with long-term capital growth. The Newton Higher Income Fund invests in UK companies, has a current yield of 7.25% and is ranked second quartile in its peer group over three and five years. Alternatively the Newton Global Higher Income Fund, which invests in a blend of international companies, has a current yield of 4.8%. It was launched four years ago and is ranked first quartile over three years.