Our top income plays

Housebuilders top the bill. Sure, trading conditions are tough and are unlikely to improve much this year. Even when interest rates fall - and the Bank of England is taking a much more conservative line here than the US Fed - until the credit crunch is allowed to run its course then mortgages will be hard to come by and will be expensive, especially for first-time buyers seeking higher loan-to-value loans. But while the population expands, immigration continues and people opt to live alone, the demand for new housing will increase, while greater longevity and the rising popularity of equity release schemes will stem the flow of properties coming back onto the market. Bellway, for example, has seen its share price collapse by 54 per cent in the past year, while profits in the half-year to 31 January were down just 4 per cent from a year earlier. Completions were barely changed and margins were down as a result of sales incentives from 18.7 per cent to 18.1 per cent. But it has already secured 88 per cent of its annual output target. So the falling share price and a 10 per cent hike in the interim dividend means the shares are trading on six times forward EPS and yield 5.6 per cent. So, for the longer-term investor looking for a good yield now and the prospect of capital growth next year, Bellway is just one of several housebuilders worth looking at.

Recovery potential

Rentokil provides a much more complex picture. The group moved out of the electronic security market to focus on parcel delivery, but its City Link parcel division has not been handled well, and Rentokil issued a . At the moment, the shares yield 8.1 per cent, but this is not even covered by post-tax profits, which suggests that the dividend and consequently the yield may be cut. But wait, chief executive Doug Flynn, the man brought in to fix the problems is leaving, , regarded as the architect in turning round troubled chemicals group ICI. So will he be able to work the same magic without cutting the dividend? Tough choice, but the shares are bombed out and that yield is very tempting. But the new management has already hinted that the dividend payment may be cut. So Rentokil serves as an example of a high yielding stock that does not conform to the general rules that would make it an automatic choice in anyone's income portfolio. Buyer beware.

Sub-prime star

Cattles, though, ticks all the right boxes even though the business of non-standard loans is currently frowned upon due to the difficulty in raising wholesale finance. And because of this, it's no real surprise to see the shares down 52 per cent from last year's high. But Cattles ticks all the other boxes. The shares yield 8.5 per cent and trade on a forecast multiple of 6, while the dividend is covered 1.7 times. Meanwhile, it has decent funding headroom, and customer numbers grew by 25.6 per cent last year even though of the 3.3m loan applications it received only 208,000 new contracts were written due to its strict lending criteria

And a riskier play

Meanwhile, the credit crunch has brought to light one or two interesting investment opportunities. Prodesse Investment is a good example. Based in Guernsey, Prodesse makes its money on the turn between residential mortgage backed securities in the US and the cost of financing the purchases. Not surprisingly, most investors would give the company a wide berth, but two factors are worth looking at. The company provides net income for distribution from the spread between the interest income earned from a portfolio of residential mortgage-backed secuties and the cost of repurchase agreements entered into to finance the purchase of such securities. And the first point is that the assets bought comprise solely of securities issued by Freddie Mac, Fannie Mae and Ginnie Mae, whose debt is implicitly guaranteed by the US Government. And the cost of financing these purchases has become cheaper all the time as the US Federal Reserve floods the market with liquidity and cuts interest rates. So much so that the differential between the two processes is now at its highest level for three years. The result of this is that quarterly dividend distributions have been rising steadily, and the shares now yield around 11 per cent. The danger is that margins could be squeezed if short-term rates rise or mortgage rates fall, although Prodesse uses floating rate notes as a partial hedge against either of these happening. Investing in Prodesse would require a much more hands-on approach because of the risk, but the yield is tempting.

Other high-yield suggestions