Monday, 20 December 2010

Inflation beating investments

Inflation beating investments

Inflation has hit a new high, but there are options for income seekers.
By Emma Wall 8:00AM GMT 18 Dec 2010

Inflation has hit a new high, with Britain's cost of living rising at the fastest pace seen in six months. The Government's official measure of inflation, the consumer prices index (CPI), hit 3.3pc in November and, even more worryingly, the retail prices index (RPI), which some consider a more accurate inflation reading, rose to 4.7pc last month.

This is another nail in the coffin for Britain's savers. The average easy-access savings account is paying 0.81pc – the effect of the Bank Rate remaining at just 0.5pc since March last year – and making it almost impossible for people to live off the income from their cash savings.

Experts are urging income-chasers to turn to equities, saying the average yield from FTSE 100 companies is more than 3pc and some income funds promise 7pc. Equities do not carry the same guarantees as savings in a cash account, but if you choose the right investment vehicle, income from savings could again be a viable option.

There are two main avenues through which to gain a yield from investing – shares that pay dividends or funds. The UK has some of the best stock markets for dividends.

Nick Raynor, the investment adviser at The Share Centre, likes Chesnara, an underwriter for life assurance products, now at 210p a share and offering a yield of 7.5pc. Royal Dutch Shell "B" is £19.41 a share and offers a yield of 5.6pc.

He also tips Aviva, at 366p, yielding 7.9pc: "Recent weakness in the share price takes the yield to almost 8pc, and the dividend is stable. We believe next year will see the dividend continue to rise."

Mr Raynor also likes Vodafone at 163p a share and offering a yield of 4.8pc and property company British Land at 484p, yielding 5.6pc.

European companies also offer attractive dividends. France Telecom paid a dividend of €1.40 last year – a yield of about 8pc.

If you want to leave stock picking to experts, choose an income fund. There are straight equity income funds, bond funds and those that invest in a mixture of the two. Equity income funds hold a selection of companies for a chosen region, such as UK, Europe, emerging markets or global funds.

There are fewer dividend-paying companies in the emerging markets region, but the number is increasing, and as it does more funds are expected to launch.

There are 75 UK equity income funds, with the top-performing over the past five years being Halifax UK Equity Income. Based on £1,000 invested, with the income accumulated, the Halifax fund has returned 42pc.
Troy Trojan Income, Unicorn UK Income and Aviva Investors UK Equity Income funds have all returned more than 35pc in the same period.

If you are after an even bigger rate of interest, you could try an enhanced income fund. This is a fund that operates in tandem with a traditional income fund and sells call options on the income fund's holdings.
Enhanced income funds aim to generate a higher income (typically a yield of 7pc a year compared with the average income fund that is now yielding 4.8pc), but at the cost of sacrificing some of the capital growth associated with shares – and they do this using complex derivatives known as options. The funds sell options, for which they receive a fee, on shares held in the portfolio based on a prediction of how the share price will rise in a three-month period.

Enhanced income funds are able to offer much higher yields than traditional income funds because of the fee they get for selling the option. There are only a handful on the market, but there are plans to launch more.

Opinions are divided as to whether they carry a higher risk than traditional income funds. Michael Clarke, the manager of Fidelity's Enhanced Income fund, said he tried to ensure as safe an investment as possible.

In opting for high income, you also lose out on capital growth, so investors need to weigh up whether they are prepared to limit capital growth potential for a little bit of extra yield. Schroder Income Maximiser yielded 7.18pc in the past year, Fidelity Enhanced Income 7.39pc, Newton Higher Income 7.97pc and Insight UK Equity Income Booster 8.76pc.

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