3 Anti-Income Investments

In a topsy turvy investment world, it might be helpful to ditch the growth vs income mindset and explore less traditional options

James Gard 24 November, 2021 | 8:43AM
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Gold bars

Bitcoin, gold and tech stocks all had a very strong year in 2020, and while cryptocurrencies continue to soar in 2021, the shine has come off precious metals and high-growth companies like Tesla (TSLA).

What these disparate assets have in common is that they usually don’t pay an income. But perhaps that matters less if high returns from such growth assets can make up for lower income from traditional sources like dividends and savings accounts.

With signs that investors are taking on more risk to get better returns, perhaps it’s time to rethink the income-seeking mindset. Here we look at some growth assets that could appeal to contrarian income investors – after all, you could always pay yourself an income from capital gains if your investments outperform.

1. Gold Miners 

Gold tends to thrive in a low interest rate world because its lack of income is less of an issue. Inflation worries and the pandemic sent investors flocking to the yellow metal last year, sending the gold price from $1,200 to a record $2,000. And while prices have since dropped back, they are still high by historical standards at around $1,780. 

If the price of the metal itself seems a bit rich, Jupiter fund manager Ned Naylor-Leyland  saysshares in the companies that mine the metals are still lagging. “We are seeing rising free cash flows, rising dividends in the majors, exploration success, and greater merger and acquisition activity,” he says. 

Looking in detail at the Morningstar Global Gold index, investors may be surprised to learn that its biggest holdings also pay a respectable yield. US company Newmont (NEM), the world’s largest gold producer, has the biggest weighting in the index with 14.5%. While Newmont shares are currently trading above their fair value, according to Morningstar analysts, the yield of 2.3% is more consistent with an income than a growth stock.

“The company has regularly increased its dividend, and its yield sits slightly above most of its peers without sacrificing investments or balance sheet health,” says analyst Kristoffer Inton. Canada’s Barrick Gold (GOLD) is the second largest company in the Morningstar Index and yields around 1.8%.

2. Tech Stocks

Income investors have traditionally shunned technology stocks because dividends were thin on the ground and these companies were perceived as too high risk for people who need a steady income.

But after 2020’s stellar performance, tech stocks are now some of the world’s biggest companies: the top five names in the S&P 500 are all broadly tech stocks: Apple (AAPL), Microsoft (MSFT), Amazon (AMZN), Alphabet (GOOGL) and Tesla (TSLA). This presents a problem for “income at all costs” investors because the dominance of these companies – and recent gains – make them hard to ignore. (My colleague John Rekenthaler has looked at what this shake-up means for index investors).

It would be hard to generate an income from a portfolio of these five stocks, not least because three of them (Amazon, Alphabet and Tesla) don’t pay dividends. But Apple doesn’t quite fit in the “tech doesn’t pay income” narrative. It paused dividend payments for 17 years of its life and restarted them in 2012 – since then, it has paid out a staggering $461 billion in dividends and share buybacks, which is where companies buy back shares from existing investors. Apple's current yield of 0.5% is not much to write home about, but shareholders enjoyed $2.6 per share of income last year and the shares rose 70% to boot. 

After the recent earnings season, US tech companies have shown few signs of losing momentum. Apple shares are up 25% so far this year, Amazon is up 13%, Alphabet up 69% and Tesla up 50%. Many experts predicted that the tech giants could not repeat 2020's gains, but they were wrong.

3. Cryptocurrency

Buying cryptocurrencies has been the ultimate anti-income trade, because they’re all about growth - which recently has been spectacular. While too risky and volatile for many, some investors have piled in this year in the hope this strong run can continue. There are reasons to be cautious, though. “As a virtual asset that doesn’t generate cash flows, Bitcoin has no intrinsic value. Its value depends largely on what people are willing to pay,” says Morningstar analyst Amy Arnott, in her in-depth analysis of cryptocurrencies

She concludes that a small fraction of crypto in a portfolio can help increase diversification, but Bitcoin was 15 times more volatile than equity markets over 10 years, so it's worth asking yourself whether you have the appetite for this rollercoaster ride.

Professional investors like JP Morgan and Ruffer are now getting in on the act (although Ruffer has since sold out), which is helping to support prices, but that’s making Bitcoin less useful as portfolio diversifier, Arnott says. Bitcoin’s move into the mainstream was tested with the IPO of one of the largest crypto exchanges, Coinbase, in April. Despite the hype, and soaring prices of cryptocurrencies this year, Coinbase's share price has fallen since the float. There's We’re not suggesting buying Bitcoin for income – or even for growth – but it is growing in importance as an alternative asset class. (Before you take the plunge, read this first.) 

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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James Gard

James Gard  is senior editor for Morningstar.co.uk


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