5 Decent Income Picks That Ought To Beat Bonds

Published in Investing on 18 July 2012

Bond offerings are flavour of the month. But they're not the only game in town.

Launched last Thursday, a retail corporate bond by inter-broker ICAP (LSE: ICAP) would appear to be already in danger of being oversubscribed.

Here's the news, straight from the horse's mouth:

"The Offer Period for the ICAP 5.5% p.a. fixed rate 6 year retail Bond is closing early. Although originally scheduled to close at 12.00pm on Tuesday 24th July, the Offer Period will now close at 10.00am on Wednesday 18th July 2012."

In short, as you read these words, it's already too late to get in at the offer price of £100 per £100 nominal. If you still want the bond -- and its tasty-looking 5.5% fixed-rate yield -- then you'll need to buy it through the London Stock Exchange's retail bond market.

Gunning for income

But the real story here, of course, is that investors are chasing income. And with Bank Rate at a record low of 0.5% -- and some experts expecting a further cut to 0.25% -- that shouldn't come as any surprise.

Tesco's (LSE: TSCO) recent bond offer was also heavily subscribed, for instance, and again closed early. Earlier this month, Severn Trent (LSE: SVT) also got away a successful launch, raising £75 million on a 10-year bond linked to the retail price index.

And, as I've said, you don't have to wait for new launches to load up: go to the London Stock Exchange's retail corporate bond market and you'll see bonds on offer from companies as diverse as GlaxoSmithKline (LSE: GSK), British Telecom (LSE: BT-A) and National Grid (LSE: NG) -- the latter being another example of an inflation-linked bond.

Blue-chip dividends

But for investors chasing income, corporate bonds aren't the only game in town, of course.

Look closely, and you'll not only see blue-chip shares offering higher yields than the same companies' corporate bonds, but also decent blue-chips on sale at yields similar to -- or higher than -- the ICAP bond offer that has just closed.

ICAP's own shares, for instance -- as opposed to its 5.5% bond issue -- have a forecast yield of 6.8%.

And when it comes to capital growth, of course, you don't need me to remind you, shares offer considerably more capital growth upside than bonds.

Five to favour

So here are five broadly diversified decent-looking income picks on tasty-looking forward yields, along with their five-year dividend growth record.

For, as I pointed out just last week, dividend growth is the other side of the income story -- and the 'sweet spot' is a share that has a high-but-sustainable yield, and a decent history of growing the dividend.

And as a starting point, the five picks below push the right buttons for me. Indeed, I hold three of them myself. Over the five, their average forecast yield is 5.4% -- virtually indistinguishable from the ICAP bond.

CompanyToday's price5-year dividend growthForecast yield
British Land (LSE: BLND)540p8.2%5.2%
GlaxoSmithKline (LSE: GSK)1,454p9.2%5.4%
J. Sainsbury (LSE: SBRY)314p10.6%5.4%
SSE (LSE: SSE)1,403p9.9%6.2%
Royal Dutch Shell (LSE: RDSB)2,280p9.5%5.0%

Source: Bloomberg and Digital Look.

Under the bonnet

As it happens, über income-investor Neil Woodford -- who looks after two of the country's largest investment funds, and runs more money for private investors than any other City manager -- counts one of these three shares among his very largest holdings.

Which one? Its name is revealed in a special free report from The Motley Fool -- "8 Income Shares Held By Britain's Super Investor" -- which profiles no fewer than eight of his largest holdings, and explains the investing logic behind each one.

What's more, another of the shares is profiled in a further special free report -- "Top Sectors Of 2012" -- which reckons that its share price might be 10% undervalued. Again, the report is free, and can be in your inbox in seconds.

Are you looking to profit from this uncertain economy? "10 Steps To Making A Million In The Market" is the very latest Motley Fool guide to help Britain invest. Better. We urge you to read the report today -- it's free.

More investing ideas from Malcolm Wheatley:

> Malcolm holds shares in GlaxoSmithKline, British Telecom, Sainsbury, Tesco and SSE. He does not have an interest in any other shares listed. The Motley Fool owns shares in Tesco.

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The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

anilkumar9 18 Jul 2012 , 7:22pm

Yes you have the 5% + yields but share prices can,do and are likely to go down.Bonds are less volatile and are much in favour.Almost all showing premiums over issue price,on top of the yields.

ANuvver 19 Jul 2012 , 3:59am

I went down to my local Tesco this afternoon and they were completely sold out of Woodfords.

Uber now, is it? I'll buy umlauts.

DrFfybes 19 Jul 2012 , 8:54am

"And when it comes to capital growth, of course, you don't need me to remind you, shares offer considerably more capital growth upside than bonds."

OK, I'll buy some share yielding 6%, and you'll guarantee my capital at the end of the term?

Of the 5 shares you've highlighted, looking at your share price graphs...
BLAND is down from 1400 to 600,
GSK up from 1280 to 1480
SBRY down from 600 to 316
SSE down from 1480 to 1400
RDSB up from 2050 to2300.

I haven't looked for any share split information, but I make it that £1000 in each of those companies would now be worth £4180. A 17% capital loss for a bit extyra dividend?

DrFfybes 19 Jul 2012 , 8:57am

Should have said, those prices are over the last 5 years, which is the nearest I could easily get to the 6 year term of the bond you mention at the start.

goodlifer 19 Jul 2012 , 1:32pm

" You'll guarantee my capital at the end of the term?"

Be reasonable,
Apart from one or two mathematical truths, Mr Wheatley can only guarantee you death and taxes.

And possibly inflation.

MDW1954 20 Jul 2012 , 9:43pm

Apart from one or two mathematical truths, Mr Wheatley can only guarantee you death and taxes.

Dr Wheatley, please!

Malcolm (author)

goodlifer 20 Jul 2012 , 11:06pm

Sorry, sir.

RomfordDOC 22 Jul 2012 , 7:07pm

There is no guarantee with bonds either although admittedly the world would need to fall off a cliff for that particular selection to default.

Stranger things have happened though or maybe not so strange if ZH posters are to be believed.

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