What kind of investment are you still making money with in times of zero interest?

The fall in long-term interest rates makes it harder to find investments whose returns offset inflation. What else can you invest relatively safely in order to achieve more net returns than the 2 percent increase in lifespan per year?

Bond investors have their hands in their pockets. The European Central Bank (ECB) announced last week that it would continue its zero interest rate policy longer than planned. She promises not to raise interest rates before mid-2020, and Chairman Mario Draghi even said that a rate cut is possible if the economic situation worsens even further. Jerome Powell, the chairman of the US central bank (Fed), also made it clear that the Fed is ready to lower interest rates.

The prospect of a continued loose monetary policy has caused long-term interest rates to fall sharply in recent weeks. The German, Spanish and Greek ten-year yields, among others, reached historic lows. The outstanding amount of bonds with a negative yield rose to 9,900 billion euros on Wednesday, US bank JPMorgan calculated.

Withholding tax

The Belgian ten-year yield is also approaching 0 percent. Those who entrust their money to the Belgian state for 10 years received 0.15 percent gross per year on Friday. Deduct the 30 percent withholding tax there and you still have 0.105 percent per year. This is even less than a savings account that provides the legal minimum of 0.11 percent as a sum of 0.01 percent base rate and 0.1 percent fidelity premium. In other words, as a loyal saver or holder of government bonds, you are getting poorer every year. The return is far from enough to keep up with inflation of around 2 percent.

Investors are therefore losing purchasing power. That's why we looked for investments that yield more than 2 percent net, but at the same time are risk-resistant enough over several years not to see the investment go up in smoke.

Bonds

“Aiming for a net return of 2 percent with bonds is a very ambitious goal,” says Dirk Van Praet, bond specialist at BNP Paribas Fortis. Investors must be willing to take on an exchange rate risk by investing in foreign currencies. Or they must accept a higher credit risk. That is the risk that the borrower will not repay his bonds. Bob Maes, bond fund manager at KBC, warns: “Due to higher credit and currency risks, diversification is even more important than before.”

With a gross return of 6 to 7 percent, growth market bonds in local currencies are attractive for long-term investors, says Steven Vandepitte, investment strategist at ING. “Investors should buy these types of bonds through an investment fund to adequately diversify the risks.” Philippe Gijsels, the chief strategist at BNP Paribas Fortis, prefers dollar growth market bonds over local currencies. The exchange rate risk is somewhat lower in the second category, but so is the return.

Dollar bonds from well-known companies with sufficient credit ratings, such as AB InBev, General Motors and IBM, also often offer a net return of more than 2 percent. But many specialists find the exchange rate risk of dollar paper too high. Maes: “We are rather negative about the dollar and, despite higher interest rates, we would not invest in it. The falling interest rate differential against the euro zone will lead to a weakening of the dollar.” Vandepitte disagrees. “The ECB is talking about a rate cut. Her monetary policy will not lead to an increase in the euro against the dollar. We recommend diversifying by dollar. '

Disadvantaged

In euro, only subordinated bonds, clutter-rated bonds or perpetual bonds offer a net return of more than 2 percent. A subordinated bond is more risky because, in the event of bankruptcy or serious financial problems, it is only repaid after the ordinary debts have been repaid. A recent Belgian example is the subordinated bond that HR service provider SD Worx launched in May. The demand for the bonds far exceeded the supply.

A few specialists find subordinated bonds from some insurers attractive. As an example, Van Praet mentions the recent bond issued by the Dutch insurer ASR (coupon of 3.375% and due in 2049). Maes refers to subordinated and perpetual bonds issued by Dutch insurer NN (4.5%) and Italian sector partner Generali (4.6%).

Perpetual bonds are, in principle, vulnerable. The longer the maturity of a bond, the more the price falls when interest rates rise. According to Maes, that risk is limited for now. “Since we do not expect an immediate increase in interest rates in Europe, we now have fewer problems with a longer term.” Nicolas Forest of asset manager Candriam finds Telefonica's perpetual bond with a coupon of 4.375 percent attractive. “It's a telecom operator with a strong credit quality.”

Clutter Rating

Not everyone is enthusiastic about clutter-rated bonds - issued by companies with a low credit rating. “We're not so positive about it because the business cycle is already well advanced,” says Vandepitte. A slowdown in economic growth increases the risk that companies with a lot of debt will not repay their bonds.

Debt securities in Norwegian krone and some Eastern European currencies are also attractive, according to a few specialists, although their yield in local currencies is usually lower than 2 percent. Maes expects the Norwegian krone and the Czech crown to rise, so that the yield of those bonds in euro could reach 2 percent or more. Some Polish zloty bonds have a net yield of at least 2 percent, but the supply of that paper is limited.

Inflation-linked bonds aim to protect investors against inflation because the principal amount is linked to the consumer price index. But Pieter De Ryck, bond specialist at asset manager Van Lanschot, notes that these bonds are not stable in current circumstances. “Their real interest rates are now much lower than zero.”

Listed shares

“It is impossible for an investor to maintain his purchasing power with bonds alone, unless he only invests in high-yield bonds with a corresponding risk,” emphasizes De Ryck. “You need stocks.” For a dividend yield of more than 2 percent, you can go to many listed companies. Preferably Belgian, because then you will not pay a double withholding tax that significantly erodes the return. This year, a tranche of up to 800 euros of dividends is exempt from withholding tax.

The coupon paid out by a bank like KBC already provides 4.2 percent net. The insurer Ageas brings 3.5 percent into the cash register. Companies that are ruled by the government, such as Proximus (4% net) or Bpost (6.9%), are among the most generous dividend payers. However, you should always ask yourself whether the profit distribution is sustainable. In any case, financial institutions bear a higher than average risk, as the financial and economic crisis has proven. Companies such as Proximus and Bpost pay out more than their profits, which is not sustainable in the long run. Companies with a lot of debt are also in danger of having to cut their coupons quickly if things get worse, as evidenced by the dividend halving at AB InBev or the substantial reduction at the diaper maker Ontex.

For some companies, the past can be a guide. Companies with strong family shareholders, in particular, often attach great importance to dividends. Solvay itself states on its website that it “absolutely wants to avoid” a discount in the coupon. The chemical group has succeeded in doing this over the past 30 years. Solvay provides just under 3 percent net. At the monoholding company Solvac, which only owns Solvay shares, this is even slightly higher at 3.2 percent.

Holdings

However, even well-run companies with a solid reputation and strong long-term prospects are not without risk. Any company can stem the current or face a sudden crisis, such as a fire, an attack or a fraudulent employee. Putting all eggs in the same basket is therefore the worst advice you can get.

Of course, you can buy a whole package of high-yielding stocks. But if you can only buy a handful of companies, it's better to go to the holdings on the stock market. They invest in a lot of other companies themselves, so that your risks are immediately spread. The investment company Gimv achieves the highest dividend yield with a net worth of 3.2 percent. Gimv only puts its money into unlisted companies, so-called private equity, so that the share gives you immediate access to a segment that is difficult for retail investors to reach.

The Brussels holding company GBL provides 2.6 percent net. GBL only invests slightly in unlisted companies and mainly focuses on participations in larger companies such as Adidas, Pernod Ricard or Umicore. GBL usually buys large packages, so that it can also appoint a director to help determine the strategy of the participations.

The other holdings yield less than 2 percent net, but names like Brederode, Ackermans & van Haaren, Sofina or Bois Sauvage have a tradition of increasing their coupons every year if no accidents occur. Keep in mind that although holdings are more stable than the stock market average, they also compete with the often manic-depressive cadence of the stock markets. Those who invest in stocks must take account of the fluctuations and have a long-term horizon of at least seven years.

Bricks on the stock market

Real estate also still provides attractive returns. If you want to make it easier - and perhaps safer - than buying and renting out a house, apartment or shop yourself, you can visit the 16 regulated real estate companies (GVVs) on the Brussels stock exchange. The coupons from gvvs, formerly known as real estate investors, bring in an average of 3.32 percent net. GVVs are not immune to recessions, but have been found to be more resistant to stock market corrections in the past. Due to the spread in buildings, they are already safer than investing in one building.

Buying all 16 GVVs may be a bit too much for most investors. However, you do pay a lower stock market tax when buying and selling. This amounts to only 0.12 percent of the transaction amount. For ordinary shares, this is 0.35 percent. With a total of 0.7 percent when buying and selling, Belgium levies the highest transaction tax on shares in the world.

If you only buy a few GVVs, it is best to choose to diversify into different segments. Office and retail landlords pay the most, but they are also the most susceptible to the vagaries of the economic cycle. City shops are also suffering from the rise of e-commerce. Especially in smaller cities and municipalities, you see more and more “for rent” or “for sale” signs in the shopping streets.

Vacancy

As a result, QRF saw its share price halve in two years. Baanwinkels are still on the market, though. At the primus in this segment, Retail Estates, barely 2 percent of the properties are vacant and the company increases the dividend every year. At 4.69 percent net, you get the highest return at Warehouse Estates Belgium. This has a mixed portfolio with mainly stores. The concentration in the Charleroi region may scare some, even if the vacancy rate is limited (less than 4%).

Logistics real estate specialists WDP and Montea doubled in just three years on the stock market, reducing their dividend yields to the lowest in the sector. They barely know about vacancy, while at the same time they are growing rapidly. This applies even more to healthcare real estate. The rest home specialists Aedifica and Care Property Invest have no vacancy at all. They enjoy leases of 20 years or more, which makes cash flows predictable. Both logistics players and healthcare players are steadily increasing their dividends.

For larger portfolios, it is interesting to include a few project developers. Of the four project developers listed on the Brussels stock exchange, only Banimmo does not pay dividends. That share is to be avoided for return portfolios. The other three, Immobel, Atenor and VGP, provide an average net return of 2.4 percent. In addition, they have a significant development pipeline, are still reasonably valued, and the operational figures are excellent. Dividends are likely to rise in the coming years.

The outlook is good for all three. Atenor focuses mainly on Central Europe, where there are higher margins. Land in Budapest is three times cheaper than in Brussels, but office rents are 10 percent higher. Immobel has recently started focusing more on residential real estate, leading to more stable income. In addition, Immobel is also increasingly active abroad, including Poland and France. VGP focuses on warehouses, with a focus on Central and Eastern Europe. A joint venture with German insurer Allianz generates more rental income each year, which supports VGP's dividend.

Utilities

Companies with predictable and secure cash flows over the very long term are often a safe investment. If they also take a monopoly position, that is an extra asset. No one can compete with Elia, the operator of the high-voltage network, or with Fluxys Belgium's natural gas transport and storage capacity manager.

Due to the recent price explosion, Elia's net return fell to just under 2 percent. On the other hand, Elia is also still growing thanks to its expansion abroad. Fluxys Belgium offers a net profit of 3.5 percent. Revenues are highly regulated. But for both, the more they invest, the more income they earn. The debts are relatively high for both, but due to the fixed income, that is not a problem. In addition, as semi-state-owned companies, they finance themselves at bottom rates.

TINC - The Infrastructure Company - participates in companies that are active in infrastructure, ranging from roads, locks and wind and solar energy to even holiday bungalows and a car park. The participations provide long-term sustainable cash flows. Often, contracts run for up to 30 years and longer. TINC provides a 2.8 percent net dividend yield and wants to let the payment evolve with inflation.

Cooperative shares

A separate type of shares are cooperative shares. In contrast to ordinary shares, cooperative shares have a fixed nominal value under normal circumstances and are therefore capital stable. In principle, the total return is determined solely by the dividend.

In 2019, several cooperative stocks pay a net dividend of more than 2.86 percent gross or 2 percent net. At the Cera and CreLanco banking cooperatives, the gross dividend remained stable at 3 percent. Just like last year, Limburg Wind and Wase Wind, which produce green energy, pay dividends of 3.75 and 5.50 percent respectively.

But just like a regular stock, the dividend is not guaranteed. Ecopower made a loss for the first time and therefore canceled its dividend. The renewable energy producer refers, among other things, to the aftermath of the abolition of free electricity and the shortage of provisions for contributing to the energy fund. Cooperative stocks are also less easy to trade than listed stocks.

Stock market tracker

Those who want to invest for the very long term, are willing to endure the vagaries of the stock market, and want to pay out every year, can go to stock market trackers that pay the dividends received, the so-called Distribution-Type Exchange Traded Funds (ETFs). Players like iShares and Lyxor offer these types of trackers.

Several studies have already shown that stocks are among the best investments if you can wait long enough. Sometimes that's even a long time. After the Great Depression of the 1930s, it took decades to wait for a good return, but that remains a big exception.

As a global index, the MSCI World provides the greatest diversification. The dividend yield accounts for 2.5 percent gross or 1.75 percent net. A European stock market tracker like the Stoxx600 pays more, and reaches our limit at 2.66 percent net. Of course, the return depends on the dividends paid by the companies, and therefore also on economic growth and corporate profits.

If Donald Trump quickly reaches an agreement with his Chinese counterpart Xi Jinping, that will be fine.

DISCLAIMER

• Source: De Tijd
• ‍Serge Mampaey, Investments Editor
• Wouter Vervenne, Investments Editor
• URL: https://www.tijd.be/markten-live/homepage/met-welke-belegging-verdient-u-nog-geld-in-tijden-van-nulrente/10136577.html