Up for discussion this time was income, always a popular topic among investors – while many of our readers tell us they invest for fun, in most cases there is also the serious goal of making money, more often than not to fund retirement. In fact, it’s the most commonly stated objective in the reader portfolios we receive and review each week.
But generating income is a challenge that’s become more difficult. The introduction of pension freedoms last year may have given retirees more control of their pension pots, and an alternative to unattractive annuities. But it has also introduced new challenges in how those opting for drawdown actually achieve the income they need.
As I look at it there are two primary challenges. How do you acquire income producing assets at sensible prices, given the weight of money chasing high-yielding investments? And how do you manage the risk within an income-targeting portfolio, especially if you’re having to pay more for assets or move up the risk spectrum to find the level of income you require?
I’ve been on the receiving end of two unpleasant dividend cuts already this year, both from companies that would have previously been regarded as ultra-reliable – Rolls-Royce and Centrica. If you have, too, take some comfort in Algy Hall’s presentation which depressing revealed that such cuts are often very hard to see coming. In fact, the regularity with which large caps have been cutting dividends means we should no longer regard them as any less risky than small company dividend payers – a belief our investment trust columnist John Baron explained he puts to good use in his portfolios.
To sleep more soundly at night you should also heed Leonora Walters’ advice and diversify your sources of dividend income by looking overseas – incredibly, 39% of stocks yielding more than 4% are listed in Asia. As we also heard, commercial property is another enduringly reliable source of income, and thanks to worries over Brexit gaining exposure through well-managed trusts is as affordable now as it has been for some time, with many trading at discounts to assets. In fact, as Kate Beioley points out on page 55, if you’re after high yield but prepared to take on extra risk numerous high yielding trusts are now trading at notable discounts.
For those uncomfortable with contrarian market timing calls, the other trick is to take advantage of is to use sensible asset allocation strategies, which some analysts believe are as important to long-term returns than reinvested income. There are plenty of model portfolios on our site to follow, wherever you are on your investing journey, and thanks to ETFs cheap and easy ways to build them. You’ll find our favourite 50 in this week’s magazine.
