Praemium

Fixed Interest & Bonds

Different ways to get income yield

19 Apr 2022 2 month(s) ago

There are many fixed interest options, but risk must be taken into account.

Where are the best places to find investment yield? In recent times it has definitely not been fixed interest vehicles such as bank term deposits. With official interest rates close to zero the pickings have been extremely thin, pushing investors to look elsewhere.

But as FirstLinks points out, yield can come from many places. It all depends how much risk you are willing to tolerate:

“There are many ways to achieve 5% or more depending on risk appetite. Analysts forecast the dividend yield on the S&P/ASX200 for FY22 at a healthy 5.2% plus franking (some are even higher) due to increased payments from large dividend payers such as banks and miners. Investors have received $36 billion in dividends in the past month.

“Elsewhere, Australian property trusts offer decent yields such as Scentre (ASX:SCG) 4.9% and Charter Hall Long WALE (ASX:CLW) 5.7%.

“In the unlisted space, there are thousands of funds offering income across a vast choice of asset classes. For the first time in eight years, the 10-year government bond rate is above 3%, rising further since the Reserve Bank produced its latest update below. When the spreads between government and corporate bonds are factored in, the 5% investment world suddenly has some new inhabitants.”

FirstLinks lists some corporate bonds that are offering good yields. But of course, if interest rates start to rise then the capital value of those bonds will drop. Risk can never be eliminated. That is not a problem if you hold to maturity, but it needs to be recognised:

“Without judging the merit of the credit quality of each company, these familiar names are now available in retail sizes, usually around $100,000 but often as low as $10,000.

As these are ‘wholesale’ bonds broken down into smaller parcels, each fixed interest broker has its favourite names and sources of supply. The screenshots show (prices as at 11 April 2022):

  • Aurizon (ASX:AZJ, bond AZJAU) issued with a coupon of 2.9%, maturing in 2030, yielding almost 5.5%, up from around 2.5% in 2021. The price has fallen to below 83 delivering a heavy capital loss to existing holders in less than a year.
  • Lend Lease (ASX:LLC, bond LLCAU) issued with a 3.7% coupon maturing in 2031, yield 5.3%.
  • Pacific National (Australia’s largest private rail freight company, bond PNHAU) with a 3.8% coupon to 2031 yielding 5.5%.
  • Transurban (ASX:TCL, bond TQLAU) with 3.25% coupon priced at about 85.5 yielding 5.25%.

There are many more examples for investors to consider, although these are fixed rate issues and if longer-term interest rates rise further, prices will drop even more. That’s the challenge of investing at fixed rates in an inflationary environment, but any retiree happy with locking away 5%+ for up to a decade now has many choices.”

For those looking at diversification, seeking out fixed interest options can be fruitful.

 

Reader note: This is general reporting only and should not be considered in any way to be investment or tax advice. It does not take into consideration the investment objectives, financial situation or particular needs of any particular investor. For more information please read our disclosure statement.