By Maike Currie, 10 September 2010
One headline that has dominated the investment arena over the last few years has been the search for income. And we all know the gist: with savings rates near zero, bond yields low, and dividends sliced, suspended or slashed, where do investors go for income?
For a growing number, the answer appears to be: into their savings. This past week, research published by asset manager, Schroders landed on my desk. It showed that in the last 12 months almost a third of UK adults have drawn on savings and investments to supplement their income. Collectively, they have used an estimated £60bn over the last year to cover living expenses.
Even more worryingly, those retired or approaching retirement were found most likely to have dipped into their reserves to make up a shortfall in income. And with new proposals to index private sector pension increases to the Consumer Price Index (CPI) rather than the slightly higher Retail Price Index (RPI), more pensioners are likely to be forced down the same path.
It's a very bad idea. If you're dipping into your capital to supplement an income shortfall now, you're running a very real risk of depleting your investment or savings pot, potentially reducing your income for years to come.
Of course, there is no simple answer to income investors' woes, but I do agree with those beating the global income drum. One of those advocating the need to source income from a global opportunity set is Bruce Stout, manager of the highly successful
At a press briefing this week, Mr Stout made an interesting point that income-hungry investors should heed: "Stop chasing yields".
His point is that UK investors tend to focus on high yields alone. "You should never buy yield, because yield can disappear," he says. High-yielders often include companies where dividends are most vulnerable, as investors found to their cost last year. Instead, Mr Stout urges a focus on companies with strong balance sheets and business models that are able to maintain a progressive dividend policy. Not surprisingly, these tend to be those that earn their crust overseas.
WHAT DO YOU THINK?
Where are you going for income? Where do you stand on the dividend yield versus dividend growth debate? Leave your comments below, or email Maike directly at maike.currie@ft.com
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