Let me count the ways that charities can boost income

It's important to match income strategy against risk, says John Hildebrand of Rensburg Sheppards

John Hildebrand
John Hildebrand

Everyone thinks they want more income from their investments. But a strategy of income maximisation might lead a charity to make decisions that run contrary to its long-term aims - as any institution that invested in Icelandic banks knows to its cost. With that important proviso, how can a charity boost its income?

One answer is to invest for total return. Most charities can take their return from both capital and income, and can boost the level of withdrawals they can make from their portfolios by drawing on a smaller proportion of capital gains.

A charity can also place money longer. Cash on deposit often provides a lower return than the current base rate of 0.5 per cent, but many achieve returns of more than 2 per cent if they are willing to place money with a bank for more than a year.

Indeed, the longer you place your money, the higher the income return. The rate of interest offered on 20-year bonds is currently 4.3 per cent; but the longer the bond's redemption date, the greater the capital volatility.

At present, the yield offered on long-dated government bonds is unattractive because it is likely to be lower than inflation over the next couple of years. This implies there is a sizeable risk of capital loss.

Investment grade corporate bonds will typically yield 1.5 percentage points more than equivalent government bonds. This is a larger risk premium than when corporate balance sheets were in good health. A number of corporate bond issues are currently attractive.

It's also possible to buy high-yield equities. More than 50 stocks in the FTSE 350 index currently yield above 3.6 per cent and have well-covered dividends, with the company's annual profits exceeding its dividends by at least 50 per cent. This involves more risk, but should lead to greater returns than cash in the longer term.

Commercial property is also very attractive. Charities can buy common investment funds that invest in commercial property and currently have a yield of about 6 per cent.

Charities can also buy funds that invest in infrastructure projects. Projects are generally funded by the public sector and, as they are linked to an essential service, the income from them is generally regarded as secure. These funds currently yield between 5 and 6 per cent and are normally linked to a rising dividend.

So charities can take a series of actions to increase their income, but should bear in mind their long-term aims. It is necessary to take on some risk to enhance short-term income.

John Hildebrand is an investment manager at Rensburg Sheppards

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