View the article online at http://citywire.co.uk/money/article/a634810
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.
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.
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.
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by Gavin Lumsden on Mar 07, 2014 at 18:53