Questor: the ultimate stocks for retired savers? High yield and exemption from IHT

Richard Evans 25 January 2019 • 6:40am

Gordon Buist (left), director of production at Chivas Brothers, and Stevie McGill, Fulcrum’s regional sales manager, at Chivas Brothers’ Allt-a-Bhainne distillery in Speyside, Scotland — Fulcrum Utility Services recently completed a 7.7km pipeline to bring a year-round gas supply to the Allt-a-Bhainne distillery (above) in Scotland

Questor Inheritance Tax Portfolio: Aim-quoted shares can offer the enormous advantage of exemption from death duties and some pay sizeable dividends on top

Readers who follow our Inheritance Tax Portfolio of Aim-quoted shares naturally want to be able to pass on their assets free from IHT. But many also want those same assets to generate income while they are alive.

For such investors, the ideal stock is one that qualifies for the IHT exemption and also pays a decent yield.

Today we’ll look at which of the existing shares in our portfolio pay a good income and add two more holdings that fall into this category.

Our existing high yielders

There are currently 22 stocks in the portfolio. Not surprisingly, as the Aim market is intended for young, high-growth businesses, many pay little income. But there are a couple of exceptions.

Our highest yielder is Manx Telecom with a figure of 7.2pc. This is a level that normally expresses investors’ scepticism that the dividend can be maintained, so we will keep a close eye on this stock and cannot currently recommend it for new money. Murgitroyd, the patent firm, yields 4.6pc and in our view has a more robust business model.

Brooks Macdonald, the wealth manager, yields 2.8pc and is another strong hold. We have the same view of Majestic Wines, whose yield is 2.6pc, and Michelmersh, the brick maker, which yields 2.5pc. All the other stocks in the IHT Portfolio yield less than 2.5pc.

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Two new high-yield names

We recently tipped Walker Greenbank, the wallpaper and fabrics firm, in our Monday column for readers generally. But the stock is Aim-quoted and qualifies for the IHT exemption, according to Matt Hoggarth of Thesis Asset Management, which holds the stock in its own IHT portfolio. We therefore add it to ours. It yields 5.3pc.

Another high yielder held by Thesis is Fulcrum Utility Services, which describes itself as “the only independent utilities infrastructure provider covering the whole of Britain”. Among its lines of business are laying gas pipelines – it recently connected a remote Scottish distillery to the gas network via a 7.7km pipe – and gas and electricity metering services.

It focuses on the “last mile” connection of premises to the national network. “This is the kind of work that would not be economical for bigger firms such as National Grid,” a spokesman said.

Often, once it has installed pipework to a new housing estate, for example, it will retain ownership of the pipes and earn income in return for their use for many years to come. It is one of a small number of businesses to own a licence to do this.

“We don’t see Fulcrum as another low-margin infrastructure company – there are not many competitors in the areas it focuses on and its design and build expertise allows it to take on more challenging projects and steer clear of low-margin work,” Hoggarth said. “It is the market leader in what it does.”

He said the company tended to attract repeat business from its 1,200 or so clients. It has also been making some small acquisitions.

As a result growth has been strong at about 19pc for sales and 38pc for profits in 2017-18, although Hoggarth said he wouldn’t expect such a high figure every year.

“We think it has the potential to grow well during the next few years as its expertise enables it to win new customers,” he added. “It is increasing the range of services it can offer to clients and putting capital to work in an effective way.”

He said cash generation was strong and the balance sheet “reasonable”, while a forward price-to-earnings ratio of 10 was “not challenging”. The shares yield 4.6pc.

Questor says: buy Walker Greenbank, Fulcrum Utility Services

Tickers: WGB, FCRM

Share prices at close: 83p, 45.35p

What an Aim income portfolio needs

In today’s column we have mentioned six Aim income stocks as worthy of belonging to readers’ portfolios. This is too small a number for proper diversification, so we will add further names in future and in the meantime advise readers to ensure that they hold other assets in addition to these six.