Where to go for income?

Interest rates across the developed world are likely to remain on the floor for the foreseeable future. However, options for income investment are expanding rapidly through Global, US and Asian Income funds.

Corporate bond investment and its lower volatility still retains its popularity as the go-to income asset class. The Citigroup World Broad Investment Grade Index is currently yielding approximately 4.41%, against the FTSE 100, the world’s most mature dividend market, which is currently producing roughly 4.14%.

However, equity dividends represent a growing rather than fixed income stream which is a core consideration in the current inflationary environment, even allowing for the greater volatility of equity funds. Equities provide an inflation shelter because of the likely capital appreciation and the ability of companies to pass on price hikes to customers. Therefore, clients who want an inflation hedge should consider funds that offer future income growth. 

Examining the US markets between 1988 and 2010, the total return of high-dividend equities produced 12% annualised against an all equities figure of 8%. In comparison, investment grade corporate bonds returned just over 3% and high yield corporate bonds, about 4%.

However, inflation decimated the total real returns on fixed income, with both investment grade corporate bonds and high yield corporate bonds offering little more than 1%. Equity income funds, whether in the UK, Asia or the US, continue to offer good value over the long-term.