Countless people across the UK depend on reliable income streams from their investments to fund everything from retirement to holidays.
Yet ever since the Bank of England (BoE) decided the best way to fix a dormant economy is to encourage households to spend more, opportunities to earn a salary from investments have become much harder to come by.
Cash and bonds don’t cut it anymore
Saving accounts were one of the biggest victims of the BoE’s latest package of Keynesian-inspired measures. When policymakers slashed interest rates by 25 basis points to an all-time low of 0.25 per cent, returns on 354 saving accounts were cut by the same margin or more within the same month.
According to Moneyfacts, the average easy access account generates just 0.49 per cent. As inflation currently stands at 0.6 per cent, and is expected to rise to 2 per cent by early 2017, those still hoping to generate an income in this way are now losing money.
Gilts, which are often seen as the second port of call for risk-averse income investors, don’t fare much better, either. The interest paid on lending money to the government over 10 years has been languishing at record lows ever since results from the Brexit referendum sparked a rush to safe haven assets.
Now that the BoE has reintroduced its multi-billion-pound bond-buying programme, the gap between prices and yields is set to widen even further.
Given this situation, and the knock-on effect it is having on other assets in the fixed income market, Tom Becket, chief investment officer at Psigma, no longer feels comfortable recommending government or corporate bonds to clients.
“Let’s assume that all investment managers charge their clients 1 per cent, and that the average annual inflation rate will be 2 per cent over the next ten years,” he says.
“The ‘real’ or inflation-adjusted return of the UK ten-year gilt will be -2.35 per cent annualised. It is hard to recommend that to a client and, worryingly, we are fast approaching the point where it is not just government bonds offering such miserable outcomes, but also huge swathes of the corporate credit universe, too.”
With cash and bond returns at all-time lows and another popular alternative, property, attracting high costs and unfavourable tax treatment, the options available to income investors are narrowing.
Judging by recent data, which shows record inflows into stocks and shares Isas over the past tax year, many now accept that the riskier equity market is the only hope left.
Low interest rates are generally good for companies, as they enable them to borrow for less. By pushing down the value of the pound they have also provided a timely boost to blue-chip groups, many of which generate most of their revenues abroad. Income investors will be particularly pleased, given that plenty of these names happen to be among the biggest dividend payers.