Investing for Income

m178591

My wife and I have about £150k in ISA’s in various funds, Lifestrategy 100 and similar funds with other providers. I am starting to think about moving this money into funds which generate a monthly income. I seems that many suggest bond funds. I know very little about bonds but looking at some of the funds at the moment they seem to have quite good yields. For example the M&G Global High Yield Bond Fund Sterling has a dividend yield of almost 6%, similarly the Schroeder Strategic Credit Fund L Income also has a dividend yield of about 6%. Should I just move all my money into funds like this? Looking back, they seem to have a pretty stable dividend. Obviously the fund price is up and down which isn’t to important so long as the dividend is stable. Any thoughts on the pro’s and con’s would be gratefully received. 

ColdIron

I wouldn't restrict myself to bonds, equities have their place as well. I also wouldn't restrict myself to monthly payers either, with a cash buffer to smooth out the dividends/interest you can cast your net much wider

The biggest thing to bear in mind with high yield, especially bonds, is that you can forget about capital growth. The M&G one you mention has lost 17% in 5 years, the Schroder one has fared a bit better at -7.65%. This is fine as long as you have factored it in and income is your primary objective. Mixing in some more moderate yield equity dividend payers would improve diversification and overall total return

m178591 said:

Should I just move all my money into funds like this?

I wouldn't. Have your circumstances changed so radically that you have to need to do a U-turn on your investment strategy? Do you absolutely need the income at the cost of all else?

You might be better splitting your investments, either logically or physically, into 2 portfolios. One for growth and one for income with a better thought out strategy. That is if you need income at all. Remember we know nothing about you and your wife's wider circumstances or objectives

Linton

In addition to @ColdIron's useful comments.....

A major problem with relying on bond interest income is inflation. Bond income cannot match inflation on its own.   You may be happy with 6% of £150K =£9K/year now, what about in 10 years times when £9K could be worth the equivalent of £6500 now?

To ensure your 6% income matches inflation you will need to invest in equity in some form.  This could provide  profits  to increase the £150K base of your bond portfolio or you could include a significant % of dividend income within that portfolio.

Bostonerimus1

High yielding bond funds come with risk...you don't get anything for nothing and such funds might hold bonds with less than stellar credit ratings. Also look at the term on the bonds, they might be holding a lot of long term bonds which might be good if rates start to fall, but down the road when rates rise they could become a liability...moderation is a good strategy. So I would not put all your eggs in a bond basket, I would hold a mix of equities and bonds and use interest, dividends and capital growth to generate your income. A multi-asset fun like VLS60 etc will do that, or you might break up the assets into equity and bond index funds so you can decide which to sell and also have a cash allocation for times when you don't want to sell.

JohnWinder

There's a cornucopia of issues to sort through there, with the little detail you gave, but given you might have another 25 years to invest for you should give some thought to fund costs. Apparently small costs compound to big expenses over many years if there's a lot of money involved. One of your bond funds would cost in excess of 1.2%/year in fund fees. I don't know if that's standard for funds that pay out monthly (if you really need that) but it sounds expensive. Morningstar finds fund expenses are the single best predictor of returns, and sadly, the more expensive the worse the returns as a generalisation. You pay for what you don't get.

Linton

I don’t see that the 1.2% charge is a particular issue, it just means that your 6% interest rate is lower  than would be the case if you had bought the underlying bonds directly. However you as a small private investor cannot practically buy most corporate bonds directly so the point is irrelevant.

As to index funds, basing the allocation of the underlying bonds on the size of the individual loans would seem bizarre. 

ian1246

Surely if your getting 6% interest but loosing 1.2% in fee's your effective return is only 4.8%? If that's the case, your probably better off just transferring it into a 5%+ cash Isa for no risk (bar inflationary loss - which in itself may be significant)

ColdIron

Dividends/interest and performance are net of costs

Linton

ian1246 said:

Surely if your getting 6% interest but loosing 1.2% in fee's your effective return is only 4.8%? If that's the case, your probably better off just transferring it into a 5%+ cash Isa for no risk (bar inflationary loss - which in itself may be significant)

No, the quoted interest is what you get.  Fund charges are not an added extra.  The 1.2% charges on a 6% interest fund could imply that the underlying investments are actually returning 7.2% interest

You suggest a savings account as an alternative, but savings accounts probably have higher charges than corporate bond funds since banks have higher expenses.  Perhaps the bank is putting your deposits into something equivalent to the 6% corporate bond fund but only giving you 5% interest.  The difference is that banks dont tell you what their % charges are.

Linton

Bostonerimus1 said:

High yielding bond funds come with risk...you don't get anything for nothing and such funds might hold bonds with less than stellar credit ratings. Also look at the term on the bonds, they might be holding a lot of long term bonds which might be good if rates start to fall, but down the road when rates rise they could become a liability...moderation is a good strategy. So I would not put all your eggs in a bond basket, I would hold a mix of equities and bonds and use interest, dividends and capital growth to generate your income. A multi-asset fun like VLS60 etc will do that, or you might break up the assets into equity and bond index funds so you can decide which to sell and also have a cash allocation for times when you don't want to sell.

Yes but corporate bonds are inherently less risky than shares in the same companies since in the event of the company going bust bond-holders must be paid off before share-holders. Also bond interest in £ terms  is much more stable than share price.

i agree that you need to hold a broad range of asset classes, but each is best suited to a particular job.

xylophone

You could also consider income units of mixed asset funds.

Or you could consider investment trusts.