Bonds are a slow and steady way of protecting your wealth — in theory, you’ll always get back what you put in, plus interest. This is not always the case, but, for the most part, bonds are considered to be a safe investment.
However, there has recently been an increasing amount of concern regarding the state of the high-yield bond market. Indeed, as investors have flocked into high-yield bonds, seeking yield in this low interest rate environment, there is concern that bonds have now become overvalued.
A warning
These concerns about a bond market bubble came to a head during June, when the chairwoman of the U.S. Federal Reserve, Janet Yellen, warned that investors they may be taking on too much risk by investing in high-yield but low-quality bonds.
This warning sparked a sell-off. Billions of dollars in capital has flowed out of high-yield bond funds over recent weeks. Unfortunately, there are now concerns that further outflows could lead to a bond market crash, as liquidity dries up and investors all rush for the exit at once.
Better choice
For bond investors, the possibility of a bond market crash is extremely concerning, especially when bonds are considered to be safe assets. But there is a better choice. Many shares now provide dividend yields similar to those supported by supposedly high-yield bond funds.
For example, according to Trustnet.com — the definitive source on fund information — the Aberdeen Emerging Markets Bond fund and Artemis High Income fund, which are the two highest fixed income funds in the site’s universe, only yield 3.85% and 4.07% (after fees) at current levels.
In comparison, GlaxoSmithKline (LSE: GSK) currently supports a dividend yield of 5.6%, covered one-and-a-half times by earnings per share. Further, this payout is set to hit 5.9% next year and 6.1% the year after — there are also no fees to pay for holding the company’s shares.
Additionally, Glaxo’s management has talked about the prospect of an 80p per share special dividend next year.
Plenty of opportunities
As well as Glaxo, there are plenty of other opportunities out there. HSBC (LSE: HSBA) (NYSE: HSBC.US), for example, has the support of City superstar and income seeker, Neil Woodford, and it’s easy to see why.
HSBC’s shares currently support an attractive dividend yield of 4.5%, covered nearly twice by earnings per share. Current City forecasts expect the bank’s dividend yield to hit 5.2% next year followed by 5.6% the year after.
Investors could also look to Royal Dutch Shell Plc (LSE: RDSB) to give their portfolio an income boost. Shell has consistently paid, and increased, its dividend payout every year since the end of World War Two, and it’s unlikely that the company will break this impressive record any time soon.
The company currently trades at a lowly forward P/E of 11 and supports an attractive 4.3% dividend yield, covered one-and-a-half times by earnings. Shell’s yield is set to hit 4.5% next year and 4.6% the year after.
Finally, J Sainsbury plc (LSE: SBRY) could be a good income pick. Although Sainsbury’s earnings per share are expected to fall around 10% over the next two years as the discounters encroach on the company’s turf, ,the hefty dividend payout is currently covered twice by earnings per share. So, at present, the payout does not look to be under threat. Sainsbury’s shares are set to yield 5.3% during 2015 and a similar 5.3% during 2016.
