Income Investor - Just Starting Out

Thrugelmir

Linton wrote: »

Personally I would only use an income portfolio for income but there is evidence that focusing on dividend paying shares is a reasonable investment strategy.

Reinvesting the income has been the way of building one's capital. Withdrawing the income means the invested capital withers with inflation in terms of buying power.

BLB53

Withdrawing the income means the invested capital withers with inflation in terms of buying power.

I'm not sure you are correct. With a portfolio designed to generate income, most of the growth will come from dividends (and growth of dividends), probably in the region of 80% or more.

However as dividends increase, the share prices will inevitably follow as new money will follow rising dividend equities.

Obviously if income is not needed it is better to reinvest it to supercharge the portfolio. When dividends are taken out, it will still be a growing dividend stream, and the underlying capital will still grow but not as fast as before.

Either way it will still produce far better total returns than building society deposits or bonds over say 10 years.

thelawnet

cheerfulcat wrote: »

Hi, mbbetter,

The folks at TMF are just as friendly! Here's another board that might interest you - Investing for income http://boards.fool.co.uk/investing-for-income-51637.aspx?mid=12533443.

BLB53 mentions investment trusts - I think that's probably your best option with smaller amounts to invest. Many of the income ITs are similar to HYPs.

Income ITs are expensive at the moment (premiums to NAV), and dealing costs can be high. A UT/OEIC is better currently.

BLB53

Income ITs are expensive at the moment (premiums to NAV), and dealing costs can be high. A UT/OEIC is better currently.

Discounts on ITs will fluctuate, but over the longer period the better performing ITs will tend to average out more towards a premium and the less well performing ITs remaining more at a discount to NAV.

Obviously it is better to purchase when at a discount but I think it is a mistake to rule out buying a trust just because its trading at a premium.

The main consideration should be charges and TR performance and the evidence is pretty compelling on both counts that ITs are generally better than OEICS.

The other factor to bear in mind is the introduction of RDR later this year which will mean ITs will get a lot more coverage from IFA platforms etc. What effect this will have on discounts I don't know but RDR will create more of a level playing field.

gadgetmind

thelawnet wrote: »

Income ITs are expensive at the moment (premiums to NAV), and dealing costs can be high. A UT/OEIC is better currently.

I'm currently avoiding income ITs and am instead focussing on direct holdings in income shares (which are themselves a bit toppy IMO) and holdings in less fashionable ITs.

Thrugelmir

BLB53 wrote: »

I'm not sure you are correct.

Nothing new.

The Barclays Equity Gilt 2008 study demonstrates the importance of reinvestment. It shows that £100 invested in equities at the end of 1899 without reinvesting income would be worth £13,580 by the end of 2007, whereas with dividends reinvested, £100 would be worth £1.64 million.

The chart below shows how this has worked more recently, showing that with dividends reinvested the FTSE All Share returns 633%, whereas the capital return is only 212% in the 23 years to the end of November 2008. Clearly a policy of targeting dividends should be core to anyone’s investment policy. However, over the same period the average return from a UK Equity Income fund is only 1.16x greater than that of the average UK All Companies fund^ (where there is no income requirement).

http://www.bestinvest.co.uk/article/7672/The-Power-of-Dividends

BLB53

I'm aware of the effect of reinvesting dividends, however I would not say that when income is taken from the investment, as you put it -

Withdrawing the income means the invested capital withers with inflation in terms of buying power.

£100 invested in equities at the end of 1899 without reinvesting income would be worth £13,580 by the end of 2007.

A 136 fold increase is hardly a withering away.

The point I was trying to make was that whilst the capital is still invested and growing - yes at a slower pace - the income (dividends) continue to grow year on year ahead of inflation.

You can't have it both ways.

Thrugelmir

BLB53 wrote: »

the income (dividends) continue to grow year on year ahead of inflation.

That's a big assumption. There's no guaranteed increase in dividends at all. BP being the classic example now.

Many companies have disappeared in my years of investing. So assumption that they'll be around for eternity is short sighted.

I prefer income as I use the cash to spread my risk.

BLB53

According to the Barcap research you quote in your previos post, real returns on equities (after inflation) over the past 50 years are over 5% p.a., and over 20 years are 4.8% p.a.

As most of the returns (80% - 90%) come from dividends, I think its safe to say dividends grow year on year ahead of inflation. OK there may be the odd year when they don't grow so much but generally, over time and collectively.

Thrugelmir

BLB53 wrote: »

According to the Barcap research you quote in your previos post, real returns on equities (after inflation) over the past 50 years are over 5% p.a., and over 20 years are 4.8% p.a.

As most of the returns (80% - 90%) come from dividends, I think its safe to say dividends grow year on year ahead of inflation. OK there may be the odd year when they don't grow so much but generally, over time and collectively.

I can only speak from my own experience and knowledge. In days gone by. Banks for many years were like utilities. Boring but safe. Then we had a 15 year boom. Investors have lost capital big time. So much depends on the actual investments held as to whether one is successful or not.

Having said the above. I've been a fan of Standard Chartered for many years and not for the dividend income either.