Investing for income: 'By any measure, these yields look enticing'

Investing for income: 'By any measure, these yields look enticing'
As interest rates fall towards zero, equity income funds and bonds could be better bet than cash.

By Kara Gammell
Last Updated: 3:32PM GMT 11 Feb 2009

The rate cut last week left many savers receiving virtually nothing from their capital. But for savers willing to take a bit of risk, there are ways to generate a decent income.

Darius McDermott, managing director of Chelsea Financial Servies, said: "By any historic measure, equity and bond fund yields are looking enticing – not to mention discounts on investment trusts.

"There are serious dangers, namely the worsening economic picture and the state of the banking system which will affect capital growth – but attractive income payments should soften the blow to investors somewhat while we await a pickup in markets."

James Davies, investment research manager at Chartwell, said: "As long as investors are prepared to hold investments for the medium to long term and are comfortable with a degree of capital volatility, now is the right time to be turning to market-linked investments to meet your income."

Drawing income from cash accounts is looking less and less attractive – particularly when you factor in tax and inflation, said Mr McDermott.

Mark Dampier, head of research at independent financial advisers Hargreaves Lansdown, offered a warning for return-hungry investors: "Take great care and always understand exactly what you are buying. While a 1 per cent interest rate may be poor, other asset classes have capital risk. Don't forget that the general rule is the higher the yield the bigger the risk."

For investors who want to look at equity income, Mr Dampier advised funds such as Invesco Perpetual Income, Artemis Income, Threadneedle Alpha Income and Psigma Income. "Also, consider overseas income funds like Argonaut European Income, which has a good yield of 6 per cent," he added.

Equity income funds invest in the shares of companies which pay good dividends. Mr McDermott suggested Schroder Income Maximiser, which has a yield of 7 per cent.

Corporate debt, although far more risky than lending money to the Government by buying gilts, is another area where income can be high. These bonds are IOUs issued by companies and are graded according to the likelihood of the issuer defaulting on debts.

Mr Dampier recommended buying a selection of bonds, which is easiest in a fund. "Try Jupiter Corporate Bond, M&G Optimal Income, Investec Sterling Bond and Invesco Perpetual Corporate Bond," he said.

Mr McDermott suggested Henderson Strategic corporate bond, with a yield of 8.4 per cent. Jupiter yields 5.1 per cent, M&G yields 6.9 per cent, Investec Sterling yields 5.9 per cent and Invesco Perpetual yields 6.4 per cent.

Nick Raynor, investment adviser at The Share Centre, said: "More people are looking at shares because of poor returns from savings accounts." Mr Raynor tipped Vodafone. "With a yield of over 5 per cent, Vodafone has just published very good figures."

For a quarterly dividend, Mr Raynor suggested BP, which pays 6.5 per cent, and National Grid and GlaxoSmithKline, which pay 5.2 per cent and 4.4 per cent respectively. "These companies sell things that the population can't do without, which means there is always room for growth."

http://www.telegraph.co.uk/finance/personalfinance/investing/4582273/Investing-for-income-By-any-measure-these-yields-look-enticing.html