Market Musings 080522: Income Bonanza!

8th May '22 by Edmund Shing

14 comments 3168 reads

Market Musings 080522: Income Bonanza!

Today is a good time for long term-focused investors to put cash to work in discounted, higher income opportunities in stocks and bonds, IF you can ignore the current market’s skittishness.

Summary:

Simultaneous Stock and Bond Market Sell-off throws up income opportunities: 15% stock market sell-off sends the FTSE 100 dividend yield up to 4.2%; UK corporate credit also offers a 3.6% yield now
Interest rates go up, but cash is still trash: the Bank of England base rate is 1%, and average 1-year fixed rate ISA at only 0.8%, miserly considering current elevated inflation.
Criteria for an income-based portfolio: A good income yield, but not at the expense of portfolio growth; diversification between different types of asset and economic exposure; geographic diversification (not just UK)
What asset types to consider in fund format? Company/government debt, property, infrastructure, royalties, equity income & growth, oil & gas/mining
Suggestions for inclusion in a fund-based income portfolio: 9 UK-listed investment trusts to consider from different AIC fund sectors
Consider also some individual stocks: stocks that are growing earnings, cash flows and that can thus support growing dividend payments (and maybe share buybacks too) - e.g. in the Oil & Gas, Mining, Utilities and Healthcare sectors.

This week’s Podcast - alternatives to stocks, bonds and cash

WHY YOU SHOULD INVEST IN ALTERNATIVE ASSETS! (link)

What explains such poor performance of both stock and bond markets this year?
Why diversify away from stocks and bonds into other asset classes?
What attractions lie in commodities, infrastructure and alternative UCITS/hedge funds?
Is it possible to diversify within a stock and bond holding to include indirect exposure to these asset classes?
What are your preferred alternative investments today?

Simultaneous Stock and Bond Market Sell-off throws up income opportunities

One man’s pain can be another’s gain. Unless you have been 100% invested in commodities and cash this year, you have probably been caught in the twin selloffs of global stock and bond markets so far this year.

But, for long-term investors who are on the lookout for solid income investment opportunities, today is actually a good time to put money to work.

After all, lower prices can mean higher yields, if the dividends or coupons paid out by the stocks and bonds remain constant.

The dividend yields offered by the main stock indices around the world have moved up significantly since November of last year as share prices…

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cmpeckham

9th May '22

Another good post Edmund! One question I have: you emphasise caution on trusts at premiums to NAV, but include Duke Royalty (LON:DUKE) at a 17% premium. Is that because you've looked at how the NAV has been calculated (I haven't) and decided it's too cautious? Or do you not see the NAV as being particularly relevant to your valuation?

The Phoenix

Love your weekly pearls Edmund.

As an aside any thoughts on bond yields do you think they are close to topping talk is of US 10 year topping out at 3-3.25% region.

I wonder how though does this tie in with the fed presumably raising the base rate to 3% does the bond market discount the fed base rate by working/moving six months ahead or if the fed funds rate does get raised to 3% does this mean US 10 year bond yields could head up to 5-6% ?

Thanks Andy

GJR

Thanks Edmund for another interesting / helpful article.

Slightly outside the remit that you've given yourself but do you have any thoughts on Aviva preference shares , £AV.A currently yielding around 6%.

Thanks

Gordon

Edmund Shing

Hi Gordon,

they seem fine, but the equity yields more, no? and I would expect dividend growth over the medium-term, suggesting a better total return if you can stomach the equity vol.

otherwise, I would prefer diversification in the financial credit space with the Axiom Financial Debt trust above, given the current discount to NAVand higher yield.

Hi Andy,

I think we could be due a pullback in the US 10 bond yield at around 3.2%, and yes, the bond market has already discounted heavily 8 further rate hikes by the Fed this year, which would bring the Fed funds rate to 2.7% by year end. So no, I don't see the long-term bond yield at 5-6%, as the slower growth, worsening demographics and massive US government debt burden would argue against that...

Yes I think in DUKE's case, difficult to value royalties at the price paid initially, as they should be worth more in theory, otherwise DUKE have been doing poor financing deals! So I would not treat royalty companies like investment trust companies from that point of view, as I see cautious accounting for the royalties...

AcornInvestor

Hi Ed. Always good to hear your thoughts. Did you also consider commodity royalty companies? Admittedly much more geared to commodity prices. Duke seems akin to a PE fund but presumably will focus more on generating income rather than solely capital growth.

Berksbee

10th May '22

Excellent and thought provoking, thanks. I've already got 4 of your 10 shares and am tempted by a couple of the ITs you mention.

The dilemma investors face right now is cash - which guarantees you loose - or shares/bonds - where recent experience has seen an even bigger loss* - albeit short term. (*for most).

Understanding the bigger picture and what may be round the corner is important IMO. Completely get the current mood with irrational (I prefer to be kind) decisions coming out of Russia and China but there is another potential side of the coin.

What if Putin's Ukraine decisions and Xi's Lockdown decisions result in (positive) regime changes? The markets will take off big time and some resource pressures ease. How likely I cant say - but I will be leaving some money on the table in the form of investments in shares.

Yes like those too, including Anglo-Pacific and Trident Royalties in the UK, akin to Franco-Nevada in the US. Given rising energy costs for producers, commodity royalty companies are a good way to go., Edmund

JCAS

11th May '22

thanks Edmund, like others I really enjoy your posts and find them a real treasure trove for further research.

What do you think of the global income trusts such as HINT Henderson International Income Trust and MYI Murray International both on discounts atm?

thanks!

Thanks for the earlier reply re bond yields Edmund.

Any thoughts on what you see as the catalyst/s for things to start turning around just noticed nasdaq and US small cap tanking again tonight, I would have thought the all be it marginal drop in US inflation would have put a floor in but seems I was wrong.

I've been in the markets a while and personally think this is the second worst time I can remember bar the 08/09 financial crisis.

12th May '22

Yes this may be a subject for this coming weekend Andy,

but in short, CPI drop in the US was not as big as the market had hoped or expected, in particular core inflation (ex food & energy) went UP not DOWN despite a decrease in big elements like used cars. New cars, rents and other components still went up.

Ultimately I think this is just about timing now, as demand is weakening which should weaken goods prices (at some point soon).

Easiest just to watch the 2-year US treasury bond yield - when this starts really dropping (on the back of lower inflation), then should be a catalyst for everything else...

Global income is good JCAS,

but consider the following (all in £): Since 1/1/2018 (including dividends) -

HINT +21.1%

MYI +20.1%

ACWI MSCI World ETF +48.9%

GGRP Wisdomtree Global Quality Dividend Growth ETF +57.9%

Conclusion: despite the discounts, I would go with global dividend-focused ETFs, particularly those with some quality or growth added in, as these strategies tend to outperform pure income over the long term...

Great thanks Ed, noted will look at those ETFs !

Market Musings 080522: Income Bonanza!