It has been more than 10 years since we have had an interest rate rise in the UK with the ultra-low rates putting pressure on yields right across the board. The average notice account now pays 0.9% − considerably less than inflation – compared to 5% in July 2007 and the investment grade corporate bond yield has fallen from 6.4% to 2.8%.
These unprecedented market conditions have made it difficult for investors to earn a decent income without taking on excessive risk, but it is possible to build an equal weighted portfolio of three uncorrelated investment trusts that yields more than 6% with almost identical monthly payments.
The first of these funds is Funding Circle SME Income (FCIF), which is yielding 6.2% with quarterly distributions of 1.625p payable in March, June, September and December. It aims to provide shareholders with a sustainable and attractive level of dividend from a diversified pool of loans to small businesses originated through the Funding Circle platform.
FCIF was launched in November 2015 and has been a lot more consistent that most of the other peer-to-peer investment trusts. The lending platform where it gets its loans has been in operation since 2010 and has established a market leading position within the UK. It focuses on secured lending and, where unsecured, the majority of loans carry personal guarantees from the underlying company directors.
Invesco Perpetual Enhanced Income (IPE) is yielding just over 6% with quarterly dividends of 1.25 pence per share paid in January, April, July and October. It is managed by one of the most highly regarded fixed income teams in the country and invests in a diversified portfolio of high yielding corporate and government bonds.
The aim of the fund is to provide a high level of income, whilst seeking to maximise the total return by balancing the attraction of high yield securities with the need to protect capital and manage volatility. It was launched in October 1999 and had a bad time of it during the financial crisis as high yield debt was one of the worst affected areas, but has recovered strongly.
Impact Healthcare REIT (IHR) is a new fund that raised £160m at its IPO in March and has invested the proceeds in a portfolio of care homes on 20-year, inflation-linked leases. All the homes are well established and the rent should be more than sufficient to enable the fund to meet its target dividend yield of 6%.
There is excess demand for care home facilities across the country and this is expected to increase as a result of the ageing population. This means that the fund offers the prospect of NAV growth and a high and inflation linked income. Quarterly dividends are expected to be paid in November, February, May and August. These haven’t started yet, although the rental income has been accruing in the fund since it floated in March.
An equal weighted portfolio of the three funds would yield just over 6% with almost identical monthly payments once Impact Healthcare has started to pay dividends. They are also largely uncorrelated, which reduces the overall risk to your capital.