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Shares, not bonds, are still the best long-term income investment

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Shares, not bonds, are still the best long-term income investment

Indeed, with interest rates likely to fall as inflation undershoots the Bank of England’s 2pc target over the coming years, according to its own forecasts, share prices are set to be positively catalysed to a far greater extent than bond prices. 

In turn, an improving economic outlook prompted by a more accommodative monetary policy is likely to boost investor sentiment. This may encourage investors to buy riskier assets, such as shares, thereby driving their prices ever higher.

While the appeal of bonds has increased as their yields have risen, lower valuations across the stock market have made equities more attractive. 

Cheaper stock prices, after all, equate to greater scope for capital growth over the long run. Although some income investors may argue that capital returns are irrelevant to them, this column believes that a larger portfolio makes life a lot easier whatever your investment aims.

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Although the FTSE 100 index currently offers a sub-4pc income return, it is possible to purchase a wide range of equities with significantly greater yields. 

Therefore, a portfolio filled with dividend stocks can generate a far more enticing income return than any index yield initially suggests. 

And with numerous stocks having long track records of maintaining, and even growing, dividends in spite of tough operating conditions, equities may prove to be a far more reliable route to income than many fixed income investors realise.

Therefore, while some income investors may currently be intent on purchasing bonds, Questor retains its preference for dividend shares. Although they are far from perfect, their overall income appeal on a long-term view continues to exceed that of bonds.

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In fact, it is possible to build a diverse portfolio of high-yielding shares that offers a relatively reliable income which grows at an above-inflation rate over the coming years. 

When the low valuations of equities and an improving outlook for the economy amid a more accommodative monetary policy are added to the mix, the total return potential of shares is highly likely to exceed that of bonds.

As a result, equities, rather than fixed income assets, will be the main focus of our income columns in the future.

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