Healthy high yields

Since 13 December, when we published the article, our picks have delivered total returns of 7.2 per cent on average. The equivalent figure for the FTSE All-Share is 6.5 per cent. Tellingly, the outperformance can be attributed purely to dividend income. The share prices rose only 3.5 per cent, compared with 4.2 per cent for the index. That matters because the income outperformance is practically guaranteed to continue – the average dividend yield on these stocks is 8 per cent.

As usual, the average return masks substantial differences in underlying performance. The highest-yielding stocks - in particular over-indebted Redefine International - have fallen as investors have avoided risk. Likewise, the top performer was Mucklow, an industrial property specialist that stands out because of its low debt load and strong track record with market timing.

Indeed, with hindsight, we know that investors would have been better off buying large or mid-cap property companies than small-caps. The FTSE 350 property sector has generated a total return of 21.5 per cent since 13 December, led by the London specialists Derwent London and Great Portland Estates. Investors have prized security, which means London's West End over-returns - ironically driving returns for the most fully-priced assets.

This theme - which has also helped push bond yields down to improbable lows - may continue to play out as long as the eurozone debt and banking crisis goes unresolved and the UK economy bounces in and out of recession. As it does, the small-cap property stocks, which typically operate outside of London, may well continue to languish on large and, in some cases, widening discounts to book value. Those book values could also fall as the regional property market weakens further.

Yet the companies will still be paying out substantial dividends backed by commercial rents; a low-risk income stream. And when a recovery finally becomes entrenched - whether in three, five or even seven years' time - the combination of rising property prices and narrowing discounts should amply reward those investors patient enough to see the story through.

10 HIGH-YIELDERS

CLS Holdings

We identified CLS Holdings (Buy, 670p, 21 Jun 2012) as our favourite growth stock in December, and it didn't disappoint. Factoring in a £7.9m tender-offer buy-back, it produced total returns of 18.8 per cent. The City-fringe office landlord boasts an entrepreneurial owner-manager, a very low cost of debt and a vacancy rate of just 3.9 per cent - low for higher-yielding properties. It is also a pan-European player, with offices in France, Germany and Sweden as well as London. That means a substantial part of its portfolio is inflation-indexed – the normal practice on the continent - ensuring higher levels of growth than most of its UK-focused peers. The discount to book value has narrowed since December as the shares have risen sharply. But given the company's long-term track record of clever management and growth, it's still among our top property picks.

Redefine International

Redefine International (Buy, 33p, 30 Apr 2012) is the stand-out underperformer in our basket. Investors have been put off by high leverage – the company owes nearly £4 for every £5 of property it owns – and falling valuations. Yet the company has a credible rescue plan: its South African parent, also called Redefine, has promised to underwrite a rights issue to pay off two big securitised debt packages. The yield – which is fully covered by rental income – is now an eye-watering 16 per cent. We cannot help but see value in the shares, although they have fallen substantially since our tip (Buy, 40p, 20 Oct 2011).

Primary Health Properties, Medicx and Assura

Primary Health Properties or PHP (Buy, 314p, 22 May 2012) and MedicX (Hold, 78p, 28 May 2012) both own GP surgeries, which they lease to the NHS. We can now add a third company to this list: after a disastrous experiment running other services for the NHS, Assura has returned to its original business of leasing out primary-care assets under new chief executive Graham Roberts.

It's a steady business, with no speculative development or letting risk. Rents are set by an arm of the NHS bureaucracy. With NHS finances now much tighter, rental growth is now "subdued", reckons Mr Roberts. But the NHS cannot cut rents because it needs the private sector to develop new facilities. Rental growth is therefore likely to be modest but positive. Both MedicX and PHP have performed well - we identified them as our low-risk favourites in December - but Assura is now the value play in the peer group, on a 14 per cent discount to book value. Its dividend yield is noticeably lower, but has more scope for growth because it is fully covered. The risk-averse may also want to consider a new retail bond PHP has launched.

Mucklow

Top-performer Mucklow (Hold, 324p, 22 Feb 2012) reported "encouraging signs of improvement" in a May trading update, but that alone can't explain the 23 per cent jump in its shares, which now trade on a hefty premium to book value. It's a well-run company and our tip (Buy, 273p, 28 Aug 2009) performed well, but we wouldn't be buying at current levels.

Picton Property

Picton Property (Buy, 40p, 29 Jun 2012) is one of the lower-quality property funds on offer, as the 10 per cent yield and 30 per cent discount suggest. The chairman recently hinted that dividends would be cut to improve cover (93 per cent last year). But that would still leave the yield looking very generous, and a recent refinancing deal should be a catalyst for a re-rating of the shares.

Town Centre Securities

Town Centre Securities (Buy, 168p, 11 Jul 2012) has generated a total return of 14.4 per cent since December, mainly due to a 12.2 per cent rise in the share price. But it still trades at a huge discount to book value, which is at odds with an excellent long-term dividend record. We stand by our recent buy tip (160p, 16 Feb 2012).

McKay Securities

McKay (Fairly priced, 119p, 23 Nov 2011) has had a busy few months and the share price has risen accordingly. Crucially, it managed to re-let a refurbished office at Blackfriars at a good rent (although still less than the previous occupier, Lloyds, was paying). It has also extended a lease to the Student Loans Company for a Glasgow office and bought a high-yielding office near Farnborough that's ripe for conversion to housing. The company has limited rental growth prospects, but its big dividends look increasingly secure. The shares trade on a big discount to book value if you strip out the effect of a troublesome portfolio of interest-rate hedges.

Local Shopping Reit

Local Shopping (Buy, 43p, 24 May 2012) has been disappointing. The main problem remains excessive leverage, which has exacerbated valuation declines despite excellent cash flow and dividends. Yet the company remains well-run and a yield near 10 per cent is too high to ignore. We still think it will prove a profitable long-term investment and stand by our tip (Buy, 49p, 11 Aug 2011).

High-yield shares