Seven key considerations for the income investor
Think about these things to help your investments pay
Income investors have felt the pinch recently. With interest rates at near-historic lows, many have been forced to take more risk with their money to obtain decent yields.
In addition, assets that pay a reliable income have been priced at a premium, as demand for these investments has increased.
Markets may be testing, but there are steps investors can take to maximise their income potential while ensuring they’re not risking too much with their capital.
For those seeking a sustainable and long-term income from their investments, consider this income investment checklist:
1. Take a multi-asset approach for income
It’s important to diversify your investments across asset classes. This diversification allows investors to buy into higher-paying assets, but ensures not all their capital is tied up in riskier investments.
Remember also to vary your choices within each asset class. Yields and the corresponding risks can be quite different within the fixed-income universe. For example, the yield on 15 year gilts – British government bonds issued by HM treasury – fell to 0.34% in July, whereas Investment Grade Corporate Bonds returned 5.9% between 2000 and 2019 1.
Beyond bonds and equities, investors may want to consider assets such property, cash or infrastructure. A multi-asset investment trust with an income focus could be a good way to gain such diversification.
2. Look at overseas investment trusts for dividends
The UK has historically been a good place to invest in equities with decent dividends. But recently, there has been an increase in the number of global trusts and funds with an income focus.
Stephen Macklow-Smith, Portfolio Manager of JPMorgan European Investment Trust plc – Income Shares says: “More overseas companies are now focused on using profits to make dividend payments to investors. This has created more options for income investors.”
By investing in a mix of UK and global investment trusts, investors can help to further diversify their holdings.
3. Think flexibly to protect investment capital
If you take a regular fixed income from your portfolio, this can magnify capital losses when markets fall. In a prolonged downturn, investors should be prepared to reduce the income taken to help preserve their capital. If not, they may be forced to take a larger slice of the remaining funds to meet their income needs, further depleting their portfolio.
4. Phase pay dates in investment
No one should try to time the markets, but it’s worth thinking about how regularly your investments pay an income. Most dividends will be paid once or twice a year, depending on the company’s dividend policy, whereas corporate bonds and gilts typically pay their fixed income annually.
Look at the dates these income payments are due. If you need a more regular income, you may be able to split your money across different investments so pay dates fall across the year.
5. Review your investments
It is worth reviewing your investments regularly. Have these investments paid the income you expected? If they underperformed, you may want to consider rebalancing your portfolio.
6. Reinvest surplus income in investment
Where possible, reinvest surplus income payments to boost overall returns. Over time, this should help grow your capital, delivering a more sustainable long-term income stream.
7. Don’t overlook capital growth in investment
If you want your retirement saving to provide a sustainable income for 30-plus years, you need to ensure your capital is growing. Focusing solely on investments that pay the highest yields potentially puts this capital at risk, which could jeopardise the income you receive long-term. Try to balance income needs with growth options.
Simon Crinage of J.P. Morgan says: “It has been a tough climate for income investors in recent years. But there may be some light on the horizon, with interest rates starting to edge up both in the UK and the US.
“Our team of experienced income managers will look at fixed income and equity options from across the globe to identify the investments that pay a decent yield today, and have the potential to sustain these payments tomorrow.”
1 Wise Alpha August 2020