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Five investments for a safer income

07 April 2014

Brewin Dolphin’s Nik Stanojevic and Ben Gutteridge are tipping a mixture of stocks and funds for investors seeking a sustainable income stream.

By Daniel Lanyon,

Reporter, FE Trustnet

Cautious income investors should buy shares in BHP Billiton and Direct Line and the Henderson Preference & Bond, Standard Life European Equity Income and Jupiter Japan Income funds according to Brewin Dolphin’s Nik Stanojevic and Ben Gutteridge (pictured).

ALT_TAG Income investing has a wide appeal, particular for those who are retired and in greater need of regular money.

However, it can be difficult to boost income from investments without taking on substantially more risk.

Here, Brewin Dolphin’s Nik Stanojevic and Ben Gutteridge offer their tips for income generating stocks and funds for the cautious investor.


BHP Billiton

Stanojevic, equities analyst for Brewin Dolphin, tips miner BHP Billiton as a stock that should prove fruitful for investors hunting for income due an improving balance sheets freeing up space for dividend growth.

“BHP Billiton screens well compared with the sector on organic volume growth, cost control and falling capital expenditure which should lead to better free cash flow and higher capital returns to shareholders,” he said.

“It has the safest dividend in the sector, in our view, and unlike the vast majority of mining companies, it did not cut the dividend during the 2008-2009 financial crisis.”

“In addition, it has top tier assets, good commodity diversification, relatively low geopolitical risk, a strong balance sheet and experienced management.”

Miners have been out of favour in recent years in line with growing expectations of a slowdown in China’s economic growth.

However a number of managers have been upping their exposure to the sector because of changes in management and ultra-low valuations. FE Alpha Manager Margaret Lawson recently said she was considering buying back into the sector.


Direct Line

Stanojevic also likes Direct Line’s as he says its dividend could grow by 40 per cent between 2013 and 2015 as it cuts costs and can afford to pay out more of its earnings due to its strong capital position.

“There is strong evidence that cost cutting plans are working and it already reached its 2014 operating cost target in the fourth quarter of 2013 – we believe that this target could therefore be ultimately beaten,” he said.

“Management incentives are aligned with shareholders, in our view. Incentive plans are based substantially on return on tangible equity metrics, which rise if dividends are increased.”

“The large special dividend declared at the final results provides evidence that management is serious about returning cash to shareholders.”

Both shares have returned a profit over one year, but in the case of BHP Billiton this was just 7.33 per cent compared to 20.79 per cent for Direct Line.


Performance of stocks vs index over 1yr

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Source: FE Analytics

Royal Bank of Scotland was forced to sell Direct Line as part of its 2008 government bail-out deal.

The bank sold 20 per cent of its holding in September 2013 in accordance with its bail-out terms and announced in February 2014 it would sell a further 423.2m shares but must also sell its remaining stake before the end of the year.

Direct Line reported, also in February 2014, its pre-tax profits rose 70 per cent, year-on-year.


Henderson Preference & Bond

The £605m fund, co-managed by two FE Alpha Managers John Pattullo and Jenna Barnard, is focused on the production of income, says Ben Gutteridge, head of research at Brewin Dolphin.

“The managers have the ability to invest across the fixed income markets, in investment grade and sub-investment grade credit as well as other instruments such as government bonds and preference shares as and when they deem it appropriate.”

The fund has underperformed compared to its sector average over three years. It returned 18.6 per cent compared to 20.41 per cent.

Performance of fund vs sector over 3yrs

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Source: FE Analytics

However, it has pulled away in the past year and has outperformed its sector, returning 5.45 per cent compared to 3.45 per cent.

“The flexible mandate gives the managers the freedom to seek out interesting opportunities with the best risk/return profile, and their excellent long-term track record gives us confidence that the fund will continue to deliver a high level of income whilst balancing the risks to investors,” Gutteridge said. “The fund currently yields around 6 per cent.”


Standard Life European Equity Income


European equities are a contentious place for many investors at the moment with some pointing to low valuations and improving market confidence as the ideal time to pick up cheap stocks.

Others say the threat of deflation could derail any gains made from the continents improving macro indicators.

“This fund targets a yield of 115 per cent of the benchmark and aims to deliver a sustainable income stream as well as capital appreciation through a relatively concentrated portfolio investing throughout the market cap spectrum.”

It has beaten both its sector and benchmark over three years, returning 31.22 per cent compared to the IMA Europe ex UK sector average of 25.93 per cent and a rise in the FTSE World Europe ex UK of 23.04 per cent.

Performance of fund vs sector and benchmark over 3yrs

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Source: FE Analytics

“Although roughly half of the portfolio will be invested in more typical high dividend stocks the remainder will be allocated to companies based on their dividend growth and dividend upgrade potential.”



Jupiter Japan Income

Income hungry investors have not flocked to Japan in recent years, however a number of analysts have pointed to improving economic indicators in the country and low valuations as being potential drivers to a more dividend friendly environment.

“It may be an oxymoron to search for equity income in Japan however the Jupiter Japan Income fund is one of the few that has this focus,” Gutteridge said.

“Through a relatively concentrated portfolio this fund will have a quality large cap bias and the managers tend to follow a GARP [Growth at a Reasonable Price] philosophy, which can result in a tilt to growth factors.”

“Though there is not a specific yield target on the fund the process is to screen for cash flow, ideally growing cash flow, and this coupled with good management will mean the fund tends to be invested in quality, dividend paying, companies.”

The fund has not beaten either its sector or benchmark over three years. It returned just 9.26 per cent compared to an average sector performance of 19.14 per cent and a rise in the Topix of 18.97 per cent.

Performance of fund vs sector and benchmark over 3yrs

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Source: FE Analytics

“The managers do not guarantee to pay more than the index however the index yield has historically been a fairly low hurdle and, given the types of company in the portfolio, it is likely this fund will produce a growing income stream.”

“Its quality bias has hampered performance slightly, especially last year, but this is one of a small number of strategies providing a, relatively, decent income.”

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Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.