Yesterday afternoon I delivered an enjoyable presentation to the local Cranleigh U3A Collectives group.
They had formulated an agenda which covered a number of investment topics; items in which they were all interested and wanted to learn more about.
One of the areas we covered looked at the tricky subject of investing for income in the current market and economic environment.
I say ‘tricky’, because income investors have had a pretty rough time of it of late.
My slide on the subject simply listed a series of figures – 0.5%, 1.9% or 2.6%, 2.46%, 3.2% and 4.5%.
After (rather cruelly) asking the group to guess what each of these figures represented, I explained they were the Bank of England Bank Rate, CPI inflation or RPI inflation, the 10 year Gilt yield, the average FTSE 100 dividend yield and UK commercial property yield respectively.
What I was trying to illustrate by sharing these figures was how tricky it is to invest for income right now.
In an environment where cash is paying 0.5% and gilts are paying 2.46% (they have been paying much less than this in recent months), it is unrealistic to expect to generate a particularly attractive income from your investment portfolio.
Once you take price inflation and investment charges into account, it’s not unreasonable to expect a very low or even negative yield.
So what steps can investors take to redress the balance?
One option to consider is investing outside of the traditional income generating assets. Investors might consider areas including global bonds, Asian equity income funds or even infrastructure funds.
Of course the hunt for a higher yield comes with greater risks to capital. There is always a trade off between risk and reward.
Another option is to invest for capital growth and withdraw capital from your portfolio, rather than rely on the natural income yield.
This can even be advantageous from a tax perspective, as it can result in using your annual capital gains tax exempt amount, rather than seeing yield subjected to income tax where the personal allowance is often already used up by earned income.
Investors still need to set realistic expectations when it comes to the potential total returns, and there is the risk of capital erosion should returns fail to meet expectations, but it is an alternative to natural income to consider.
What income investors must do in the current market and economic environment is consider carefully the purpose of their portfolios, how it supports their overall financial goals and how much pressure they need to place on their capital to meet income needs.
We live in extraordinary (economic) times; income investors need to respond accordingly.
