Discount Watch
This week’s Discount Watch sees 27 Investment Companies trading at 52-week high discounts. Eight less than last week. A sign things are looking up for the sector, or just a blip?

By
Frank Buhagiar
08 Apr, 2024

We estimate there to be 27 investment companies whose discounts hit 12-month highs over the course of the week ended Friday 05 April 2024 – eight less than the previous week’s 35.discount watch pic 1 08.04.24Fair few 52-week highs were made on Tuesday 02 April 2024, a weak day all round for global markets following a sell-off in US Treasuries – strong economic data continues to weigh on the timing of those much-anticipated interest rate cuts. No surprise then that the interest-rate sensitive renewables remain the biggest contributors to the list with seven names, same number as last week. UK Equity Income funds held onto second place but only contributed four names compared to six previously.

The top-five discounters

Fund Discount Sector
Gresham House Energy Storage GRID -72.19% Renewables
LMS Capital LMS -67.30% Private Equity
Life Science REIT LABS -53.99% Property
Gore Street Energy Storage GSF -45.46% Renewables
Downing Renewables & Infrastructure DORE -37.29% Renewables
The full list

Fund Discount Sector
Asia Dragon DGN -19.73% Asia Pacific
Scottish Oriental Smallers Cos SST -18.17% Asia Smaller Cos
NB Distressed Debt NBDD -23.19% Debt
NB Global Income NBMI -26.52% Debt
Real Estate Credit Investments RECI -21.22% Debt
Jupiter Green JGC -30.65% Environmental
RIT Capital Partners RCP -30.56% Flexible
abrdn New India ANII -22.53% India
JPMorgan India JII -20.78% India
LMS Capital LMS -67.30% Private Equity
Value and Indexed Property VIP -27.78% Property
Develop North Prop DVNO -1.26% Property
Life Science LABS -53.99% Property
Gore Street Energy Storage GSF -45.46% Renewables
Bluefield Solar Income BSIF -26.80% Renewables
Downing Renewables & Infrastructure DORE -37.29% Renewables
Foresight Solar Income FSFL -30.24% Renewables
Greencoat Renewables GRP -24.43% Renewables
Gresham House Energy Storage GRID -72.19% Renewables
Octopus Renewables Infrastructure ORIT -33.36% Renewables
Dunedin Income Growth (DIG) -12.88% UK Equity Inc
Shires Income SHRS -15.03% UK Equity Inc
Merchants MRCH -4.56% UK Equity Inc
Schroder Income Growth SCP -14.80% UK Equity Inc
Miton UK Microcap MINI -17.54% UK Microcap
BlackRock Throgmorton THRG -10.52% UK Smallers Cos
Henderson Smallers HSL -15.27% UK Smallers Cos

The Tip Sheet
With interest rates expected to fall later in the year, The Times asks: is now a good time to look at the infrastructure sector? Elsewhere, will Schroder’s Real Estate Investment Trust’s green credentials be a deciding factor when sentiment turns?

By
Frank Buhagiar

Questor: Buy this fund for at least 15 years of rising dividends
BBGI Global Infrastructure (BBGI) as caught the eye of The Telegraph’s Questor Column, but why now? Share prices have tumbled in the infrastructure sector, triggered by rising interest rates which have made cash and bonds more appealing for income-focused investors. But with interest rates expected to come down later this year, Questor believes now could be a good time to take a look at the sector and specifically at BBGI which runs infrastructure assets such as toll bridges, roads, hospitals and prisons in G7 countries. And, it does it well – since launch in 2011, BBGI has generated a total return of 170.8%.

Questor is particularly drawn to BBGI’s shares because of the “attractive, government-backed 6pc yield and the potential for capital growth as they languish 13pc below the value of the fund’s assets”. And according to Questor, BBGI is “the least risky fund in its sector.” That’s because, unlike its peers, BBGI does not invest in economically exposed assets, such as water companies. Instead, its assets are 100% availability based so to get paid it just has to ensure the facilities it manages remain available for use. How much the fund earns therefore does not depend on how many people use the assets or what the regulator says it can charge. What’s more, revenues are inflation-linked and based on long-term contracts, giving the fund’s revenues a high level of visibility. Because of this, the company is able to claim that “without further acquisitions the current portfolio could increase dividends for the next 15 years before starting to wind down and repay capital to shareholders.”

In conclusion, Questor believes BBGI “offers the potential for strong share price recovery if interest rates fall and enhance the appeal of its payouts. This is a high quality, inflation-linked income fund that invests shareholder capital wisely.”

MIDAS SHARE TIPS: Property firm Schroder Real Estate Investment Trust building a green and clean empire
According to The Mail on Sunday’s tipster, Schroder Real Estate Investment Trust’s (SREI) strong green credentials make the fund stand out from London’s REIT crowd. True, that’s not been enough to prevent the shares from being caught up in the sell-off that has hit the sector in recent years, but it could be enough to position the company well for when sentiment takes a turn for the better.

For management’s strategy to green the fund’s properties by, for example, making use of renewable energy and more efficient boilers makes sound business sense. Not just because regulations due to come into force by 2030 will require landlords to reduce their properties’ carbon footprint, but also because tenants, themselves under pressure to meet their own sustainability targets, are prepared to pay higher rents for buildings that are ‘green and clean’. What’s more, energy-efficient properties have cheaper running costs, thereby offsetting the higher rents charged. By seizing the bull by the horns SREI’s shares, now 42p, “should respond.”

And then there’s SREI the value play to consider. An independent valuation estimated the fund’s portfolio to be worth around £458 million, more than twice the current £200 million cap. As Midas concludes: “Schroder REIT has been hit hard by widespread antipathy towards the property sector but sentiment should change and Schroder shares should rally. At 42p, the stock is a buy, while generous dividends add to its appeal.”

The Results Round-Up – the week’s Investment Trust results
Which fund has generated a 33% NAV total return since its December 2020 IPO? And which funds are gearing up to take advantage of compelling valuations? Find out in this week’s round-up.

By
Frank Buhagiar

Fidelity Asian Values’ (FAS) contrarian approach

FAS reported a -2.4% NAV total return for the half year. That compares to the MSCI All Countries Asia ex Japan Small Cap Index’s +3.6% sterling return. According to the Portfolio Manager’s Review, it wasn’t stock selection that led to the shortfall: “Our stock selection continued to contribute positively to the Company’s relative performance.” Instead, “our market selection was a drag against a backdrop of continued divergence in country performance. Since our investment process can lead us to take contrarian positions in undervalued businesses, our combined exposure to China and Hong Kong was close to its historical high. China and Hong Kong continue to underperform and have dragged down the Company’s relative returns compared to the Index.”

The Portfolio Managers don’t appear overly concerned: “Although our value style has underperformed the growth style in recent years, we believe this headwind should, at some point, become a tailwind. Small cap value stocks are currently trading at close to all-time high discounts relative to both their large cap and their small cap growth counterparts. Value stocks also generate superior earnings growth over time compared to growth stocks and provide better cash returns, in terms of dividends.”

Winterflood: “Share price TR -2.5% as discount widened slightly from 5.3% to 5.7%”.

Scottish Oriental Smaller Companies Trust’s (SST) managers are excited

SST comfortably outperformed over the half year – NAV per share increased 8.3% compared to a 6.8% rise for the MSCI AC Asia ex Japan Small Cap Index. And it sounds like the investment managers are expecting more of the same: “We are excited about the portfolio’s prospects, given the solid balance sheets of the portfolio’s holdings, their strong growth potential and attractive valuations.”

Winterflood: “Key contributing geographies were India and Taiwan, while Indonesia and Hong Kong detracted. The managers expect portfolio companies to emerge with increased market share once the operating environment improves.”

Global Opportunities (GOT) primed for the great unwind

GOT reported that its 1.7% NAV increase for the year failed to keep pace with the 15.7% generated by FTSE All-World Total Return Index. Thing is, the FTSE All-World Index is not GOT’s benchmark. In fact, GOT hasn’t GOT a benchmark at all. According to Chairman Cahal Dowds: “The Company has no stated benchmark against which it seeks to outperform. Its objective is to achieve real long-term total return through investing in undervalued global securities.” But as Executive Director Dr Sandy Nairn explains, “as the year progressed, markets took the view that falling inflation would lead to interest rate declines and that the equity party could recommence”. GOT is having none of it though “We do not subscribe to the view that the post ‘Global Financial Crisis’ world can be recreated.”

“The fiscal arithmetic is such that limits on the extent to which governments can sustain growth are now very real. Indeed, history suggests that fiscal retrenchment will be required at some point soon. Rather than a rosy economic environment ahead, the storm clouds look to be gathering.The portfolio remains positioned to take advantage of the ‘great unwind’ when it comes whilst both protecting investors and providing some upside at the same time. It is a difficult period since patience is one of the hardest virtues to sustain. However, in our view the evidence is still overwhelming that great caution is required.”

JPMorgan: “The poor relative NAV performance vs the equity market of 2023 should probably be viewed alongside the strong relative performance GOT delivered in 2022. A large holding in cash in both years will have been a factor, holding back returns in 2023 and insulating the portfolio from the decline in markets in 2022.”

Downing Renewables & Infrastructure (DORE) up a third

DORE posted a 3.5% NAV total return for the year. That brings the NAV total return since IPO in December 2020 up to 33%. Chairman Hugh Little “is pleased that during the period DORE continued to build significantly on its key objective of diversification by geography, technology, revenue, and project stage, namely through its investments in electricity grids and grid stability infrastructure projects in Sweden and the UK, and with the Company’s first Icelandic hydropower acquisition.” The investment manager meanwhile homed in on profitability, “the underlying portfolio has enjoyed a 26% jump in operating profit compared to the previous year.”

Liberum: “NAV growth levers are limited, in our view, and the yield is relatively unattractive, reducing total return potential.”

Winterflood: sees “an attractive entry point, with the fund screening cheap at a discount of 36% vs the peer average of 29%. We reiterate DORE in our recommendations list.”

Impax Environmental Markets (IEM), gearing up

IEM reported a 4.5% NAV total return for the year, which Portfolio manager Jon Forster believes validates the fund’s investment thesis: “IEM is founded on the belief that amid rising environmental challenges, companies enabling the cleaner and more efficient delivery of basic needs – such as power, water and food, or mitigating environmental risks like pollution, and climate change – will grow earnings faster than the global economy over the long term. This basic investment thesis remains firmly intact.”

The portfolio manager goes on to point out that “Compelling valuations were a key driver in the decision to refinance and increase gearing, with the upside potential more than sufficient to compensate for an increase in the overall cost of debt. Looking forward, we remain positive, based on the more favourable market outlook for mid and small caps, the strong long-term drivers of Environmental Markets and the attractive portfolio valuation.”

Numis: “The results highlight a period of relative underperformance for Impax Environmental versus the MSCI AC World index, although we caveat that the majority of the underperformance came from not holding the Magnificent Seven – given that a minimum 50% of revenues need to be derived from environmental sectors. We believe that following a period of underperformance it can be an interesting time to invest in a manager with a strong longer-term record and a clearly defined approach that has been out of favour, particularly as the shares have suffered a derating.”

JPMorgan: “We think a turnaround in relative NAV performance is required for an improvement to the rating in the near term but as a package we also think IEM remains a high-quality fund which is a good option for investors seeking exposure to environmental themes in equity markets.”

Mercantile (MRC) gears up too

MRC’s Portfolio’s Managers may well believe this has been a testing year for the UK market but you wouldn’t know it going by the fund’s full-year performance – NAV total return came in at +4.5% (debt at par value) compared to the benchmark’s +1.8%. One year’s outperformance does not maketh a summer, but perhaps 10 years does – over the 10 years ended 31 January 2024, MRC’s average annualised return stands at +6.1% per annum on a net asset total return par value basis. The benchmark’s average annual return is +4.5%.

If the fund’s gearing levels are anything to go by, the portfolio managers are confident for the future: “Despite the UK market trading at a steep discount to both its own history and relative to other developed markets portfolio companies have, for the most part, been performing well at an operational level. Notwithstanding the obvious geopolitical risks that surround us, we are excited by the investment opportunities that this combination of low valuations, improving economic indicators, and strong performing portfolio companies yields.” All of which helps explain, “our elevated level of gearing, which at the date of this report is approximately 15%. This is the highest level of gearing that we have applied in over a decade, which hopefully demonstrates most clearly our assessment of the opportunity before us.”

Numis: “Mercantile (£1.7bn market cap) is the largest fund within its peer group, focussed on UK mid/small cap companies, and benefits from a low fee structure. The fund has a strong track record, outperforming its benchmark over one, three, five and ten years and we believe that Mercantile is an attractive core holding for investors seeking exposure to this sector.”

The Motley Fool

Story by Kate Leaman

My 5 steps to achieving a passive income with the FTSE 100

I believe that creating a passive income stream through investing can be a smart way to build wealth over time. Here’s my five-step guide that helped me achieve this goal.

1. Understand the basics of the Footsie and stock market investing
   Gaining a basic understanding of the FTSE 100 and stock market mechanics is key before investing. The Footsie includes 100 major companies on the London Stock Exchange, some offering dividends from profits. It’s vital to keep abreast of each stock’s fundamentals and dividend schedules for potential yield and growth.

2. Open a tax-efficient investment account
   In the UK, I’ve found that a Stocks and Shares Individual Savings Account (ISA) is a great vehicle for tax-efficient investing. Any gains made within an ISA, including dividends, are not subject to tax. This means I can reinvest my full dividend earnings, enhancing the potential for compound growth. It’s important to understand the annual limits and rules for ISAs to make the most of this tax advantage.
   Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future.
3. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
4. Start by investing in high-dividend yield stocks
   I begin by investing in companies within the FTSE 100 that have a history of paying high dividends. I research companies that have consistently paid and increased their dividends over the years. This consistency is key to creating a reliable second income stream. Remember, investing in a diverse range of sectors can help mitigate risks.

Some of the top dividend payers in the Footsie that I’m active with include:

Shell: Shell is known for its consistent and high dividend payouts.
British American Tobacco: this multinational tobacco company has a long history of paying substantial dividends to its shareholders.
GSK: GSK has been a reliable payer of dividends, thanks to its strong pharmaceutical and consumer health business.
HSBC Holdings: HSBC is known for its significant dividend payments.
BP: another major player in the energy sector, BP has historically provided high dividend yields.
AstraZeneca: a global, science-led biopharmaceutical business that has been consistently paying dividends.

4. I reinvest my dividends for compound growth
   The power of compounding cannot be overstated. Instead of spending the dividends I receive, I reinvest them to purchase more shares. This increases the number of shares I own, potentially increasing my future dividend income. Over time, this reinvestment strategy can lead to exponential growth in my investment portfolio and, consequently, my passive income.

5. I monitor and adjust my portfolio regularly
   Investing is not a ‘set and forget’ process. I regularly review my portfolio to ensure it aligns with my income goals and risk tolerance. I’m aware of market changes, and I consider rebalancing my portfolio if certain stocks or sectors become too dominant. This will help in managing risk and keeping my investment strategy on track.

From small streams, mighty rivers do flow
By following these steps, I have worked towards building a stream of passive income that can support my financial goals, whether it’s for retirement, additional income, or fulfilling other personal aspirations.

Edward Sheldon, CFA

£10k in an ISA? Here’s how to generate a ton of passive income

Passive income can provide a lot more financial freedom and security. Here’s an easy way to generate some within an ISA account.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. 

Passive income’s a hot topic in the financial world right now and it’s easy to see why. When creating this form of income, it brings with it a lot more financial flexibility.

The good news is that today, there are more opportunities to create passive income than ever before. With that in mind, here’s an easy way to generate a ton of it within an ISA.

Easy income

One of the simplest ways to generate passive income today is to invest in dividend stocks. These stocks – which are available within Stocks and Shares ISAs – pay investors regular cash income out of company profits.

With these investments, creating an income stream is easy. All that’s needed is to buy one or more stocks. The investor can then kick back and let the cash (dividends) roll in.

Now, the amount of income generated will depend on the dividend yields of the stocks selected. You can think of a dividend yield like an interest rate.

However, on the London Stock Exchange today there are many decent stocks with yields of 6% and higher.

Putting together a portfolio of stocks with an average yield of 6% could potentially generate £600 in passive income a year (completely tax-free) from a £10k investment in an ISA. Constructing a portfolio with an average yield of 7% can create £700 in cash flow a year.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Two things to know

What’s the catch? Well there are two. The first is that, unlike savings account interest, dividends are never guaranteed. If a company is experiencing financial difficulties it may decide to reduce or cancel its payout.

The second is that the share prices of dividend stocks can go down as well as up. So the value of an investment can fall.

Given these two issues, it’s a good idea to focus on higher-quality dividend stocks (that aren’t likely to experience significant share price weakness or cut their dividends) and not just blindly buy a bunch of high-yielders.

If u want to own a portfolio of Trusts but don’t know where to start a holding in CMPI could be a good place to start as u increase your knowledge base.

Overview
Easing rates may act as a catalyst for CMPG’s and CMPI’s underlying holdings to re-rate… Kepler

Overview
CT Global Managed Portfolio Trust (CMPG/CMPI) is a well-diversified and benchmark-agnostic trust of investment companies strategy. The trust boasts two separate share classes: one is focused on generating capital growth, and the other on income. This dual share-class structure offers investors an annual opportunity to exchange between share classes at net-asset value, without currently incurring any additional costs or UK capital gains tax.

The trust is managed by long-standing investment trust specialist Peter Hewitt. As discussed in Portfolio, Peter has been positioning the portfolios to capture the extreme value found across the investment trust universe and increasing his exposure to key secular-growth themes he believes will drive long-term returns. These themes include technology and technological innovation, alternative sources of growth and income through assets in private equity and infrastructure sectors, and the absolute and relative value available across UK equities. Having exposures to these themes negatively impacted performance over the past couple of years as high interest rates weighed on investor sentiment and saw discounts widen. However, since the end of October 2023 expectations of easing rates and a softer landing have seen the growth portfolio show early signs of a rebound.

As discussed in Discount, both share classes trade close to par, thanks to the discount-control policy, which has seen the board actively buying back and issuing shares when appropriate. The trust’s income share class also offers an attractive yield of 6.9%, which benefits from an income transfer mechanism between the two share classes .

Analyst’s View
Since the end of October 2023, rising optimism around easing macroeconomic conditions and interest-rate cuts towards the end of 2024 has contributed to CMPG outperforming the benchmark. In our view, the combination of improved investor sentiment and a narrowing of discounts across some of the hardest-hit sectors of the past couple of years could see this trend continue. As a result, we believe Peter’s increased exposure to these areas and to secular-growth themes could pay off – as they have in the past in the right environment.

We think CMPI’s high yield of 6.9% is particularly attractive, even when compared to the competitive yields currently available elsewhere in the market. The support provided by the income-transfer mechanism, the trust’s own revenue reserves and the reserves of the underlying trusts also offer some security on future dividends. Furthermore, we think the trust’s income is likely to benefit from Peter’s increased allocation to alternatives. We also think the ability for investors to transfer between the trust’s income and growth shares makes it a suitable candidate to be a ‘core’ strategy, perhaps amongst a broader portfolio of assets, which allows investors to reallocate as their investment needs evolve over the long term.

Bull
Income share class has an attractive and well-supported yield
Exposure to secular-growth themes may re-rate as macroeconomic conditions ease
Annual share class conversion facility allows shareholders to change portfolio requirements cheaply

Bear
Gearing on underlying trusts and income share class can exaggerate downside risks, as well as upside
Performance may lag if tighter macroeconomic conditions and negative investor sentiment persist
Trust of investment companies structure leads to higher look-through charges.

CMPI

ACTIVITY BREAKDOWN
Top 10 Holdings

Law Debenture Corp (The) PLC 4.6%
NB Private Equity Partners Class A Ord 4.5%
JPMorgan Global Growth & Income PLC 4.2%
Murray International Ord 3.8%
CC Japan Income & Growth Ord 3.6%
Mercantile Ord 3.5%
3i Infrastructure Ord 3.5%
Scottish American Ord 3.3%
Merchants Trust Ord 3.3%
Greencoat UK Wind 3.2%

U would own a finger nail in each of the above plus many others available to view on their website.

Another good source of information TrustNet.

There is no way of predicting the future, except one day u will cross the bar and until u do u will have to pay taxes.

The plan is to use 100k of seed capital to produce a ‘pension’ of 16k within ten years without adding any capital, u may not have 100k u wish to invest but starting with a smaller amount and adding fuel to the fire, u should be able to reach a respectable figure. The 16k is not in doubt but the timescale maybe, the future is hard to predict. Anyone with a longer timeframe to invest can beat the fcast as compound interest accrues in the final few years, often at a faster rate than all the early years.

The best example of compound interest is house prices.

The dividend amount for the last tax year was £11,072.00 compounded at 7% for the next nine years would equal 20k.

BUT the current fcast is 8k with a target for the calendar of 9k which is ahead of the current plan. The amount of the portfolio is the unknown but as u intend to use the underlying Trusts to fund your ‘pension’ u can’t sell them, so the value is of no interest. If u plan to pass on your capital pse remember those wee cats and dogs. If u don’t plan u fail to plan.

2 shares I’d buy to try and double my money in 10 years

Stephen Wright thinks there are still opportunities to to buy UK shares that can double in value over the next decade – but time might be running out.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. 

I think right now’s a great time to buy shares. Interest rates look set to fall this year and I expect this to send share prices higher. 

As a result, I’m looking to make the most of opportunities while they’re still there. And that applies to dividend shares as well as growth stocks.

100% returns

Doubling an investment over 10 years implies an an average return of 7% a year. That’s slightly above the long-term average for the FTSE 100.

At the moment, I’m optimistic this is a realistic possibility. With interest rates still at their highest levels for over a decade, I think share prices are conducive to higher long-term returns.

That’s not going to be the case indefinitely. Interest rates look likely to fall this year and when they do, I’m expecting share prices to go higher, making buying less attractive.

To some extent, I think the market’s pricing this in already. So I’m looking to get investing while there are still opportunities that look attractive to me. 

A high-yield Dividend Aristocrat

One candidate is Primary Health Properties  (LSE:PHP). The FTSE 250 real estate investment trust (REIT) comes with a 6.65% dividend yield and a strong track record.

During the last decade, the company’s increased its dividend by around 3.5% annually. If that continues, anyone who buys the stock today will average over 7% a year over the next 10 years.

Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.

The risk of unpaid rent is low for a landlord whose main tenant is the NHS. But investors should be more cautious about the company’s debt profile with interest rates at elevated levels.

This brings a risk of shareholder dilution and a possibility of a dividend cut. But as long as this doesn’t get too far out of hand, I think shareholders should do well.

A tech monopoly

If I’d bought shares in FTSE 100 property platform Rightmove (LSE:RMV) a decade ago, I’d have an investment worth more than twice what I paid for it. Could the stock do the same again?

I think so – the company’s low capital requirements allow for significant share buybacks to boost growth. Over the last decade, earnings per share have gone from 10p to 24p.

Rightmove has a dominant market position, but this might be under threat from US rival Costar Group. The company has acquired OnTheMarket to compete in the UK property sector.

That’s a risk shareholders should be aware of, but Rightmove’s entrenched position means it’ll be hard to displace. As a result, I think it has a decent chance to double again in a decade.

Growth

There’s more than one way to aim for a 7% annual return over a decade. It can either be from a company that distributes its cash, or one that retains and reinvests it. 

Either way, the key is growth. Most stocks don’t offer a return that will allow them to double in value in 10 years immediately – but working out which companies will grow enough to do this is crucial.

Income investors face a continual trade-off between risk and reward. At asset class level they can hold cash or government bonds to generate a relatively reliable, albeit historically lacklustre income return. Or they can purchase assets such as equities that offer the prospect of inflation-beating dividend growth in return for a higher chance of income volatility.
There are also wildly differing risk/reward income opportunities within the stock market. Some companies, such as utilities and tobacco stocks, have historically offered stable income returns. Others, in contrast, have produced wild variations in dividend payouts that, while proving to be relatively high over the long run, have fallen heavily during periods of temporarily weak economic growth.

An improving global economic outlook
Industries such as energy and basic materials, which include oil & gas and mining companies, respectively, are often among the most volatile income stocks due to their financial performance being heavily reliant on highly changeable commodity prices.

While they have experienced an uncertain period over recent years amid a weak global economic outlook that could persist in the short run, their relatively attractive yields, stable financial positions and improving operating prospects mean they could be worthwhile income investments on a long-term view.
After all, the world economy’s period of rampant inflation, rapidly rising interest rates and weak economic growth is now in its latter stages. While sticky inflation means the exact timing of interest rate cuts in the US, Europe and the UK may be subject to change, significantly looser monetary policies are ultimately set to be introduced over the coming years. In the US, for example, the Federal Reserve’s latest forecasts show that it expects a gradual decline in interest rates over the next two years so that they stand at around 3.1% in 2026.

Lower interest rates should, all things being equal, have a positive impact on global economic activity levels. This should raise demand for, and the prices of, a wide range of commodities and provide improved operating conditions for oil & gas and mining companies.

Stronger financial performance is likely to prompt increased dividend payments, since in many cases shareholder payouts represent a pre-determined percentage of overall profits, as well as capital growth that further enhances total returns for income-seeking investors.

Favourable risk/reward opportunities
While energy and basic materials companies have experienced a period of elevated uncertainty, in many cases their financial positions remain sound. While a solid balance sheet does not equate to robust dividend payments, since shareholder payouts are generally dependent on profits, it means that the risk of permanent capital loss is relatively low.

A solid balance sheet should also allow for any growth in profitability to be passed on to investors in the form of higher dividends. Indeed, a firm that enjoys a sound financial position will not necessarily need to use a large proportion of profits to reduce net debt or shore up its balance sheet.
In any case, the heightened volatility of profits and dividends among oil & gas and mining stocks appear to be factored into their yields. Since they are generally higher at present than those of companies operating in more stable industries, as well as the wider stock market, they provide a margin of safety for income investors in case profits temporarily fall and dividends are cut.

Relatively high yields also compensate long-term investors for the prospect of delays to falling inflation, declining interest rates and higher activity levels for the world economy.

Of course, high yields and solid financial positions do not eradicate the inherent income volatility of oil & gas and mining stocks. Investors who require a stable income stream will therefore almost inevitably find them undesirable. But for investors who can take a long-term view and look beyond heightened dividend volatility in the near term, buying a range of financially sound resources stocks with attractive yields could mean obtaining a generous income return as the world economy’s outlook gradually improves.

2 dividend stocks to take me from £0 to £9.5k in second income

Jon Smith talks through some ideas with second income potential, including one stock that has a dividend yield above 10% at the moment.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Beginning an investing career from a standing start is never easy. Yet for many, that’s the way it has to kick off. And investors are waking up to the fact that it’s possible to make a second income from dividend stocks even when they have no savings. If I was starting from £0, here’s how I’d go about trying to turn that into a generous annual stream.

The real deal

One stock I’d look to include in my portfolio would be Real Estate Credit Investments (LSE:RECI). The stock is down 13% over the past year, with a current dividend yield of 10.39%.

The business invests in real estate debt secured by commercial or residential properties in the UK and Europe. Therefore, it differs from a real-estate investment trust (REIT) in that it doesn’t own the properties, but rather helps to fund purchases of them.

The dividend yield is very high, with regular quarterly income payments. Of course, with a yield this high, there must be risk involved. This is the case, investing in debt in the property market right now can be difficult! Property developers are struggling under the burden of high interest rates. Some are going bust because they can’t afford the repayments. If enough go bust that are within the fund, it could really hamper performance.

Based on the track record, I think the management team that runs the fund can navigate these murky waters. If interest rates fall, this will certainly help the share price to recover as sentiment improves.

Banking on success

Another example I’d buy if I was starting out would be Bank (LSE:TBCG) I recently wrote about the stock from the angle of capital gains, but it equally applies when thinking about income potential.

The stock has rallied by 38% over the past year but also boasts a dividend yield of 6.8%. Better financial results not only help to increase the share price but also provide more earnings that can be paid out as dividends.

The Georgian bank has benefitted from higher interest rates, enabling it to record a larger net interest margin. Further, the Georgian economy grew by 6.8% in 2023. So there was a greater level of general spending and lending activity for the bank to get involved in.

One concern is that the stock now trades at £31. This is high for a FTSE 250 firm and can make it unattractive for potential investors. If I was only looking to allocate a small amount of money, I wouldn’t get many shares of the company.

Checking the numbers

The average dividend yield of both stocks combined is 8.6%. I’d want to include other stocks in my portfolio to reduce the risk from just these two ideas. But let’s assume I could build a portfolio with this same yield.

If I invested £300 a month, after 15 years I’d have an investment pot that could be worth just over £110k. In the following year, this could pay me out £9.5k in passive income.

Of course, I’d need to reinvest my dividends along the way to help compound growth. There’s the risk that my pot might grow at a slower rate, taking longer to reach my goal. Yet it highlights how this strategy can be very profitable.