Which investment will still make you money in times of zero interest?

The decline in long-term interest rates makes it harder to find investments whose returns offset inflation. What can you still invest in relatively safely to get more net returns than the 2 percent annual increase in lifetime interest rates?

Bond investors are at a loss. The European Central Bank (ECB) announced last week that it is continuing its zero interest rate policy longer than planned. It promises not to raise interest rates before the middle of 2020. President Mario Draghi even said an interest rate cut is possible if economic conditions deteriorate further. Jerome Powell, the chairman of the U.S. central bank (Fed), also made it clear that the Fed is ready to cut interest rates.

The prospect of continued accommodative monetary policy caused long-term interest rates to fall sharply in recent weeks. Among others, German, Spanish and Greek 10-year rates reached historic lows. The outstanding amount of bonds with negative yields rose to 9,900 billion euros on Wednesday, calculated the US bank JPMorgan.

Withholding tax

Belgium's 10-year interest rate is also approaching 0 percent. Those who entrusted their money to the Belgian state for 10 years still got 0.15 percent gross per year for it on Friday. Subtract from that the withholding tax of 30 percent and you are left with 0.105 percent per year. That's even less than a savings account that yields the legal minimum of 0.11 percent as the sum of 0.01 percent basic interest 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 not nearly enough to keep up with inflation of some 2 percent.

Investors thus lose purchasing power. That's why we looked for investments that yield more than 2 percent net return, but at the same time are risk-resistant enough over several years so that the deposit does not go up in smoke.

Bonds

'Pursuing 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 a foreign exchange risk by investing in foreign currencies. Or they have to accept a higher credit risk. That is the risk that the borrower will not repay its bonds. Bob Maes, bond fund manager at KBC, warns, "The higher credit and currency risk makes diversification even more important than before.

Growth market local-currency bonds are attractive to long-term investors with gross yields of 6 to 7 percent, says Steven Vandepitte, investment strategist at ING. 'Investors best buy these types of bonds through a mutual fund to spread the risks sufficiently.' Philippe Gijsels, chief strategist at BNP Paribas Fortis, prefers dollar-denominated growth market bonds to those in local currency. The exchange rate risk is somewhat lower with the latter, but so are the returns.

Also, dollar bonds of well-known companies with enough creditworthiness, such as AB InBev, General Motors and IBM, often offer net yields above 2 percent. But many specialists think the exchange rate risk of dollar paper is too high. Maes: "We are rather negative about the dollar and despite the 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. Its monetary policy will not lead to a rise in the euro against the dollar. We recommend diversifying into dollar.'

Subordinate

In euro, only subordinated bonds, junk-rated bonds or perpetual bonds offer a net yield of more than 2 percent. A subordinated bond carries more risk because in the event of bankruptcy or severe financial problems, it is repaid only after ordinary debts have been repaid. A recent Belgian example is the subordinated bond launched by hr service provider SD Worx in May. Demand for the bonds far exceeded supply.

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

Perpetual bonds are basically 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. "Given that we don't expect an immediate rise in interest rates in Europe, we now have fewer problems with longer maturities. Nicolas Forest of asset manager Candriam finds Telefonica's perpetual bond with a coupon of 4.375 percent attractive. 'It is a telecom operator with strong credit quality.'

Rommelrating

Not everyone is enthusiastic about junk-rated bonds - issued by companies with low credit ratings. 'We are not so positive about them because the business cycle is already well advanced,' says Vandepitte. 'As economic growth slows, the risk increases that highly indebted companies won't repay their bonds.

Debt securities in Norwegian krone and in some Eastern European currencies are also attractive, according to a few specialists, although their yields in local currency tend to be lower than 2 percent. Maes expects the Norwegian krone and Czech koruna to rise, which could push the yield on those bonds in euro to 2 percent or more. Some bonds in Polish zloty achieve net yields of at least 2 percent, but the supply of that paper is limited.

Inflation-linked bonds aim to protect investors from inflation because the principal is linked to the consumer price index. But Pieter De Ryck, a bond specialist at asset manager Van Lanschot, notes that those bonds are not inflation-linked in current conditions. "Their real interest rates are now much lower than zero.

Quoted shares

'It is impossible for an investor to maintain his purchasing power only with bonds unless he invests exclusively in high-yield bonds with a corresponding risk,' De Ryck stressed. 'You need equities.' For a dividend yield of more than 2 percent, you can go to many listed companies. Preferably Belgian, because then you don't pay a double withholding tax that sharply erodes the yield. This year, a tranche up to 800 euros of dividends is exempt from withholding tax.

The coupon paid by a bank like KBC already yields 4.2 percent net. The insurer Ageas brings 3.5 percent into the till. Companies where the government holds sway, such as Proximus (4 percent net) or Bpost (6.9 percent), are among the most generous dividend payers. However, you should always ask yourself whether the profit distribution is sustainable. Financial institutions carry a higher than average risk anyway, as the financial-economic crisis proved. Companies like Proximus and Bpost are paying out more than their profits, which is not sustainable over time. Highly indebted companies also risk having to cut their coupons quickly when things get worse, as evidenced by the dividend halving at AB InBev or the sharp cut at diaper maker Ontex.

With some companies, the past can be a guide. In particular, companies with strong family shareholders often attach great importance to dividends. Solvay itself states on its website that it wants to "absolutely avoid a coupon cut. The chemicals group has succeeded in doing so for the past 30 years. On net, Solvay yields just under 3 percent. For the monoholding Solvac, which holds only Solvay shares, it is even slightly higher at 3.2 percent.

Holdings

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

Obviously, you can buy a whole bunch of high-yield stocks. But if you can only afford to buy a handful of companies, it's better to turn to the holdings on the stock exchange. They themselves invest in a bunch of other companies, so your risks are immediately spread. The investment company Gimv achieves the highest dividend yield, with a net 3.2 percent. Gimv puts its money only in unlisted companies, so-called private equity, so that the stock gives you immediate access to a segment that is difficult for small investors to reach.

Brussels-based holding GBL yields 2.6 percent net. GBL invests only slightly in unlisted companies, focusing mainly on stakes 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 its investments.

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 there are no accidents. Keep in mind that while holdings are more stable than the stock market average, they also swing along on the often manic-depressive cadence of stock markets. Those investing in stocks should take the swings with them and keep a long-term horizon of at least seven years.

Bricks at the fair

Real estate also still provides attractive returns. Those who want to make it easier - and perhaps safer - than buying and renting a house, apartment or store themselves can turn to the 16 regulated real estate companies (Sicafi) on the Brussels stock exchange. The coupons of gvv's, formerly known as real estate investment trusts, bring a net average of 3.32 percent into the drawer. Gvv's are not immune to recessions, but in the past they proved more resilient to stock market corrections. Because of the spread in properties, they are already safer than investing in a single property.

Buying all 16 gvv's may be a bit over the top for most investors. Although you do pay a lower stock market tax when buying and selling. That is only 0.12 percent of the transaction amount. For common stocks, it's 0.35 percent. At 0.7 percent in total for a purchase and sale, Belgium has the highest transaction tax on shares in the world.

If you only buy a few GCVs, it's best to spread out into different segments. Office and retail tenants bring in the most, but they are also the most subject to the vagaries of the economy. City stores also suffer from the rise of e-commerce. Especially in smaller cities and towns, you see more and more "for rent" or "for sale" signs in the shopping streets.

Vacancy

As a result, QRF saw its stock price halve in two years. Job stores are still good in the market, though. At the primus in this segment, Retail Estates, barely 2 percent of properties are vacant, and the company increases its dividend every year. You get the highest return at 4.69 percent net at Warehouse Estates Belgium. That has a mixed portfolio of primarily retail properties. Its concentration in the Charleroi region may scare some, even though vacancy rates are limited (less than 4 percent).

Logistics real estate specialists WDP and Montea doubled on the stock market in barely three years, reducing their dividend yields to the lowest in the sector. They have hardly any vacancies, while at the same time they are growing strongly. This is even more true of healthcare real estate. Nursing 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 raising their dividends.

For larger portfolios, it is interesting to include some developers. Of the four property developers listed on the Brussels Stock Exchange, only Banimmo does not pay dividends. That stock is to be avoided for yield portfolios. The other three, Immobel, Atenor and VGP, yield an average net return of 2.4 percent. Moreover, they have a significant development pipeline, are still reasonably valued, and their operating metrics are excellent. Dividends are most likely to rise in the coming years.

For all three, the outlook is good. Atenor focuses mainly on Central Europe, where there are higher margins to be had. In Budapest, land is three times cheaper than in Brussels, but office rents are 10 percent higher. Recently, Immobel has been focusing more on residential real estate, which leads to more stable revenues. Moreover, 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 brings in more rental income each year, which supports the dividend at VGP.

Utilities

Companies with predictable and secure cash flows over the very long term are often a safe investment. If they also have a monopoly position, that is an added advantage. No one can compete with Elia, the operator of the high-voltage grid, or with the natural gas transmission and storage capacity operator Fluxys Belgium.

Due to the recent price explosion, Elia's net return dropped to just under 2 percent. On the other hand, Elia is also growing thanks to expansion abroad. Fluxys Belgium offers a net 3.5 percent. Earnings are highly regulated. But for both, the more they invest, the more revenue they drive in. Debt is relatively high for both, but the fixed income doesn't make that a problem. Moreover, as semi-state-owned companies, they finance themselves at rock-bottom interest rates.

TINC - The Infrastructure Company - participates in companies active in infrastructure, ranging from roads, locks and wind and solar energy to even vacation bungalows and a parking lot. The shareholdings provide sustainable long-term cash flows. Often the contracts run up to 30 years and beyond. TINC provides a 2.8 percent net dividend yield and aims to keep the payout in line with inflation.

Cooperative shares

A separate type of shares are cooperative shares. Unlike ordinary shares, cooperative shares in normal circumstances have a fixed par value and are therefore capital fixed. The total return is basically determined solely by the dividend.

Several cooperative stocks are paying a net dividend of more than 2.86 percent gross or 2 percent net in 2019. At the banking cooperatives Cera and CrelanCo, the gross dividend remained stable at 3 percent. Limburg Wind and Wase Wind, which produce green energy, are paying dividends of 3.75 percent and 5.50 percent, respectively, as they did last year.

But as for an ordinary share, the dividend is not guaranteed. Ecopower posted a loss for the first time and therefore cancelled its dividend. The renewable energy producer cites, among other things, the aftermath of the abolition of free electricity and the lack of provisions for contributing to the energy fund. Cooperative shares are also less readily tradable than listed shares.

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 a payout every year, can turn to stock market trackers that pay out dividends received, known as Exchange Traded Funds (ETFs) of the distribution type. Players such as 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 very long time. After the Great Depression of the 1930s, it was decades of waiting for good returns, but that remains a major exception.

As a world index, MSCI World provides the greatest diversification. The dividend yield is good for 2.5 percent gross or 1.75 percent net. A European stock market tracker like the Stoxx600 yields more, and at 2.66 percent net it does reach our limit. Of course, the yield depends on the dividends paid by companies, and thus also on economic growth and corporate profits.

If Donald Trump quickly strikes a deal with his Chinese counterpart Xi Jinping, it will work out.

DISCLAIMER

• Source: The Time
• ‍SergeMampaey, Editor Investment
• Wouter Vervenne, Investment Editor
• URL: https://www.tijd.be/markten-live/homepage/met-welke-belegging-verdient-u-nog-geld-in-tijden-van-nulrente/10136577.html