When the share prices of quality growth shares have been moving higher for the past decade it’s easy to say that people should not invest for dividend income. All they have to do is sell a chunk of their portfolio every year if they need income to live on. This strategy can make a lot of sense if you have the temperament – and, importantly, the time – to cope with the ups and downs of share prices, and ultimately if share prices keep on going up.
Many people who are reliant on their investment portfolio to provide an income for their daily needs may not be able to cope with a big fall in its value if they are selling chunks of it using a drawdown strategy. This is because they may not have enough time to wait for values to recover in a bear market.
Instead of investing in growth companies, they might plump for investments that can pay them a high proportion of income relative to their purchase price – a high interest rate or yield – with the reasonable expectation that this can continue as long as they need the income. In other words, the source of income is relatively safe.