Whats so special about income?

pip895

This is a potentially rather silly question that I am a bit embarrassed to ask.
It came out of a discussion with an IFA some years back and has been niggling ever since. The discussion was regarding the setting up of a SIPP - he was very keen I had a balance of income and growth stocks.

If we are talking about investments (OEICs etc.) in a SIPP or ISA why are income baring stocks so important? I can see the importance of having a balanced portfolio and the importance of balancing income & CGT outside a tax free wrapper, but in it? Surly it is only the total return that counts?
Is it just that if you had enough income units in a SIPP in drawdown, you might never need to go in and sell anything? - it might largely look after itself, or is there something else I have missed?

ChesterDog

I would say that, as so often, it is a question of balance.

As you say, in general, the total return is the thing, but it's all about how best to achieve that while accommodating a degree of stability and security.

Growth stocks tend to be somewhat riskier and potentially more volatile than income generators. A good income payer will often have more restricted opportunities for growth.

Linton

Two reasons for buying dividend paying shares, or the funds that invest in them....

1) You need the income. A reasonably good dividend is normally higher than bank deposit interest and is tax free for standard rate tax payers. It is less certain than bank interest but much more stable than share values. Additionally over the long term, it will tend to broadly follow inflation alongside company profits.

2) "Value" investing. Companies which pay higher dividends tend to be good solid investments at a sensible price. Buying such shares and reinvesting the dividends has been a pretty successful investment strategy, particularly if you prefer to avoid some of the excitement of Emerging Markets/Small Companies etc etc.

Of course nothing is guaranteed - the banks were good dividend payers until the crash when the dividends abruptly stopped. So you need very broad diversification. If you have less than say £50K to invest funds are the best way to access dividends.

pip895

Thanks - So it is just a matter of balancing risk. There is no difference, apart from what is done with the income, between Accumulation & Income units of the same fund. It is just that dividend paying shares in general tend to be less volatile.

Chickereeeee

Income shares tend to hold value better in a falling market, but fall behind in a rising market.

However their main advantage (to me) is that you dont have to sell units when their market is at a low to get cash: the dividends keep coming anyway.

So I try for a dividend income stream to cover basics, and capital gains for extras.

Even if you are not planning on taking income for a while, I have seen long periods where the growth of "income funds" (income re-invested) has exceeded that of "growth funds", so probably still worth having.

CLAPTON

Obviously the total return and degree of risk are all that really matters

however many people are reluctant to actually cash in stock as they see it as eroding 'capital' whereas spending 'income' is OK.

this effect is particularly true when the market turns down as people feel they are selling at below the highest price and so feel uncomfortable at their lose of profit.

this effect is true even for simple savings accounts: many people prefer monthly interest so they can spend as they go without eroding capital but are reluctant to have interest yearly and withdraw a little capital each month.

planteria

the 'value' that Linton mentions, along with the dividend (income) which is paid, allowing more shares to be bought, resulting in compounding over time. http://en.wikipedia.org/wiki/Compound_interest

Chickereeeee

planteria wrote: »

the 'value' that Linton mentions, along with the dividend (income) which is paid, allowing more shares to be bought, resulting in compounding over time. http://en.wikipedia.org/wiki/Compound_interest

Well, growth shares are actually (or should be!) doing this for you. Instead of paying a dividend, they are using the cash to invest in the company, producing further growth. This is similar to you re-investing the dividends into the same company, but without the tax implications, so more efficient. Some would say that the need to maintain a dividend imposes a stricter management discipline, however.