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Elston: How to find stable income and an attractive yield in the current market

Income has been hard to come by for investors, with many companies slashing their dividends and bond yields continuing to drop.

Jonathan Jones

By Jonathan Jones, Reporter, FE Trustnet
Monday August 22, 2016

Investors looking for income in current market conditions need to get creative, according to Peter Elston, chief investment officer at Seneca Investment Managers. 

Income is becoming increasingly hard to come by for investors, with current accounts yielding little following the Bank of England’s decision to cut interest rates to 0.25 per cent.

Additionally, government bonds have been affected, with ten year gilts now yielding around 0.5 per cent, with investment grade corporate bond yields also falling considerably.

Meanwhile, many of the large cap defensive companies are now so highly rated thanks to this dynamic, again meaning yields across high quality stocks have fallen to low levels relative to their history.

As the below graph shows, the FTSE 100 has risen 13.5 per cent so far this year, with much of the gains in defensive stocks such as Diageo (up 20 per cent in 2016) and British American Tobacco (up 32 per cent) among other such types.

Performance of FTSE 100 and stocks in 2016


Source: FE Analytics

Elston (pictured), who co-manages the Seneca Global Income & Growth Trust, says that these traditional investments are not attractive at current prices and yields and that his fund is looking at other areas for its growth. Below, he details his favourite areas and which investments the fund has made within each.



The first area Elston highlights is real estate investment trusts, a sub-section of the funds’ specialist assets.

He looks at specialist investment trusts that offer something more than equities or bonds, with examples including a more stable income stream than equities, potentially higher yields, or perhaps income streams that are more index-linked.

“If you think about it, REITs satisfy all of those three criteria,” he said.

“You’ve got very stable income streams - I mean what could be more stable than rental income – ok in a recession maybe you get rental income falling off a little bit but it’s not nearly as volatile as earnings from UK companies. So you’ve got more stability of income and you’ve got very high yields in a lot of cases.”

He says his fund invests in REITs with a non-core aspect, which means they are not in commercial retail, not south-east oriented and do not have extremely lengthy leases.

Within these criteria, Elston says he likes Primary Healthcare Properties, which rents land and buildings to doctor’s surgeries.

“A lot of those leases are guaranteed by the NHS and are locked in, and a lot of those leases have a RPI (retail price index) element built into the rental renewal.”

The other he suggests is GCP Student Living, which as the name suggests, rents student accommodation to university undergraduates.

“There’s a huge structural case for student accommodation - there’s a big shortage of it and you’ve still got Asian students pouring into the UK.”

Performance of equities in 2016


Source: FE Analytics

So far this year, as well as yielding around 5 per cent and despite a post-Brexit drop, both have risen 8 per cent as investors look to add solid income-producing assets.

Asset leasing firms

“Another area I like is specialist financials – so things like asset leasing,” Elston continues.

He suggests aircraft leasing firms, which are perceived as less risky as they provide planes to (generally) stable, well-established travel businesses.

In the sector, he likes Doric Nimrod Air Two (DNA2), which leases six A380 aircrafts to Emirates Airlines as well as 30 other planes to different companies. Another is Dr Peters, which provides four Boeing 787-8 fitted with Rolls Royce engines to Thai Airways and Norwegian Air.

Performance of companies in 2016


Source: FE Analytics

While DNA2 has fallen so far this year, DP Aircraft has risen 5 per cent as the above graph shows, however the former delivers a more attractive dividend of 4.5p compared to Dr Peters’ 2.25 cents.

“Are they risk-free? No, of course not. There are all sorts of risks, but we don’t think that they’re risks that warrant these companies being on such high yields,” Elston said.

These specialist sectors are not a small part of his portfolio either, with around 25 per cent of his assets invested across these areas among others.

“We’ve got about 25 per cent of our funds invested in specialist assets so it’s a really substantial part and if you look at the price performance – a) a lot of these funds have done better than the equity markets and b) they’ve had much lower volatility than the equity markets.”

He adds that they also – in some cases – are negatively correlated to equity markets, meaning not only do they provide decent income but they diversify a portfolio as well.



The third area Elston is interested in is mid-caps, as he says they can provide solid returns while also exposing investors to high growth – unlike their large cap counterparts.

While he does own overseas mid-caps that, while providing a higher return, are having to pay their dividends out of capital, the UK mid-caps, he says, do not.

“We’ve got a whole load of UK mid-cap companies where the average pay-out ratio is maybe somewhere around 50 to 60 per cent. So you get that effect from the overseas funds paying out of capital more than balanced out by these mid-caps that are not paying out of capital,” he said.

“That’s different to the large caps where the FTSE 100 has a pay-out ratio now of 150-160 per cent so all of them are paying out of capital.”

In the mid-cap space, he particularly likes International Personal Finance (IPF), which paid a 12.4p dividend to investors in 2015, and has grown its pay-out in each year since 2009.

Spun out from Provident as its overseas sister company, it used to be a darling of growth fund managers, but took a hit a few years ago when some countries began to introduce interest rate caps.

“All of a sudden this company went from being a darling to being the absolute pariah as interest rate caps meant its days of growth were over.”

Performance over 5yrs


Source: FE Analytics

As can be seen by the graph, the fund has suffered in recent times, falling from a high of 668p in 2013 to 273p currently.

“Yes this is still an issue – this company does charge high interest rates – but the choice for governments is to either severely regulate the likes of IPF or to force borrowers into the hands of loan sharks, so I think even though you’ve seen a period of increasing restrictions there’s potential for a lot of this regulation to be reversed or at least adjusted,” Elston said.

Elsewhere in the mid-cap sector, Elston suggests the likes of Ashmore, particularly if investors believe a resurgence in emerging markets is likely, while biotech firm Victrex, which has a very well covered dividend and yields 2.6 per cent, is another that he likes for income with high growth potential.

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Data provided by FE. Care has been taken to ensure that the information is correct, but FE 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.

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