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Income Investor: why I'm not buying retail bonds

HGV operator Stobart has become the latest company to launch a retail bond. Income Investor explains why he's not buying.

 
Income Investor: why I'm not buying retail bonds

Another week, another retail bond offer.

This week it's Stobart’s 5.5% bond offering. I wish them luck with that: Stobart has achieved the almost impossible task of making HGV trucks loveable. However, I do look at their rapid diversification with a bit of scepticism, particularly the investment at Southend Airport, with which I am slightly acquainted – did you know it featured once in a James Bond movie?

So, I won’t be buying. In fact I haven’t bought any of the recent retail bond offerings. Why not?

Why I'm steering clear

There is one practical reason: it is not obvious how to buy them within the wrapper of an individual savings account (ISA) or a self-invested pension plan (Sipp), and all my stock market investments are sitting in ISAs or Sipps as avoidance of tax is a key principle in my investing approach.

These bonds, before they hit the market, must be purchased through agents, and (as far as I am aware) none of my ISA/Sipp operators offers this facility.

Of course, I could buy them inside an ISA/Sipp after they have been issued, but the yields then available tend to be lower than at launch. For example, Tesco Personal Finance’s recent offering has fallen from 5% on offering to around 4% now, and ICAP’s 5.5% bond has fallen to around 4.2%.

Ok, you might say, so don't buy these retail bonds in a tax-free wrapper. Probably, but no thanks: down the road I want to minimise my income and capital gains tax. And no, I don’t want to buy and then sell when the price goes up on launch – assuming it does, of course – that is far too short term for my investing style, and too much like hard work!

A second reason is that I do not usually have a lot of cash lying about. My ISAs and Sipps generate income internally every year and I top up these accounts annually. That, plus the rare sale of something overpriced, gives me a couple of purchases a year in each account.

Any spare cash is either sitting in a long-term fixed interest account or is waiting to go into an ISA or Sipp.

Disappointing yields

The third reason is perhaps more decisive: the yields are not that great. The current average yield on my DIY high-yield portfolio is around 6%, and that includes some legacy shares that are currently not earning any income. If I invest in anything, I am looking for an income or redemption yield of over 6%, and preferably a bit more than that (always consistent with trying not to lose my money, of course).

So, looking at Selftrade’s list of popular LSE bonds, for example, I can see a handful that yield more than 6% that I can pop into my portfolio whenever I have spare cash. Plus all the other options of juicy permanent interest-bearing shares (Pibs), preference shares and high-yield dividend shares, of course.

So, good luck to those of you hoping to make money on these retail bond offerings, but it's not for me.

If you've enjoyed this article, why not visit DIY Income Investor's blog? The views in this article are the author's own, and do not constitute advice.

12 comments so far. Why not have your say?

Ladysaver

Nov 16, 2012 at 14:19

I can see why you want to minimise income and capital gains tax, but you're not minimising much by having these bonds in an ISA. These types of bonds are typically exempt from capital gains tax, and even in an ISA you pay the lower rate of income tax on the coupons. OK, so you save the higher rate, but this seems a slightly thin reason for not buying. By the way, Selftrade have offered almost all the recent retail bond issues, including these, and they have both ISAs and a SIPP. I'd have preferred to see an article assessing the merits of the Stobart bond for retail investors.

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Rob Walker

Nov 16, 2012 at 16:12

Maybe I'm missing something, but it seems like if I am about to retire with a SIPP I can convert it to an annuity for an annual income. I never have any chance to re-invest that money and I don't know what opportunities might exist in, say, seven year's time. Alternatively I can buy Retail bonds that yield similar amounts, ie. 5.5% - 6.5% for the next 7 years, then get my money back (so long as the company is sound) and invest at best rates somewhere else. What's the problem?

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yogi bear

Nov 16, 2012 at 16:55

Both Sippdeal & Hargreaves Lansdown have offered nearly all of the recent issues at launch with no dealing fees to buy. Interactive Investor are offering this one for £10 dealing fee. I have several in my SIPPs.

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Georgina

Nov 16, 2012 at 17:31

Ladysaver - the Stobart bond has been reviewed by Edmund Jackson on Interactive Investor.

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reluctant lemming

Nov 16, 2012 at 17:53

Ladysaver..actually the iii review is on the share's outlook not the bond..

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Andrew Barwick

Nov 16, 2012 at 21:23

Unlike shares the Bond interest payments are completely tax free in a SIPP or ISA, plus you don't pay any stamp duty nor do you pay any commission to Selftrade or HL when you buy a new issue - you pays your £2k and you get 2000 bonds - and up to now most of them have increased in value.

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Ladysaver

Nov 17, 2012 at 01:07

Just seen a very readable review of the Stobart bond on Selftrade's Fixed Income Investor microsite. Unfortunately it's not too favourable - concludes that this (unrated) bond is risky over the timeframe and not as attractive as recent retail bonds from e.g. property companies. Worth a read if you're seeking an objective assessment.

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pb via mobile

Nov 17, 2012 at 08:37

Andrew, if you buy these through say self trade you pay nothing either , ice you buy 2000 you pay 2000 .

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C. Caribou

Nov 17, 2012 at 17:43

After the initial offer for sale (no commission in many cases e.g. Selftrade) it is then telephone dealing for retail bonds which is more expensive. Using some brokers very much more expensive.

I would like to be able to trade these bonds on-line.

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RJC

Nov 17, 2012 at 18:11

"But am I alone in feeling slightly uncomfortable about a less than blue-chip company with questionable governance using a brand puffed up by reality tv shows, souvenir shops and gaudily daubed trucks to be touting for people's savings like this?"

 

Source: The Independant  14th November 2012

http://www.independent.co.uk/news/business/comment/james-moore-savers-should-be-careful-before-they-start-a-bond-journey-with-eddie-stobart-8313214.html

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Hilary hames

Nov 18, 2012 at 00:25

I agree with Rob Walker, my ISA is full but we are going to put a couple of thousand in this bond in my husbands isa

With regard to reviews, they have been mixed but I quite trust Investors Chronicle and they lke this bond

http://www.investorschronicle.co.uk/2012/11/07/bonds-and-forex/news-and-analysis/stobart-to-deliver-retail-bond-i7lOfes4JkxPcgnG51D6FL/article.html

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RJC

Nov 18, 2012 at 16:19

http://www.independent.co.uk/news/business/comment/james-moore-savers-should-be-careful-before-they-start-a-bond-journey-with-eddie-stobart-8313214.html

"But am I alone in feeling slightly uncomfortable about a less than blue-chip company with questionable governance using a brand puffed up by reality tv shows, souvenir shops and gaudily daubed trucks to be touting for people's savings like this?"

Source: The Independant  14th November 2012

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