Investing for Income

Eco_Miser

Now that I'm retired i really should be drawing an income from my investments to enjoy, rather than continue saving for old age.
My question is is it better to select investments with a high dividend, and take the natural yield, or have a more balanced portfolio and sell some each year as needed?
The first approach is automatic, the second needs positive action, and I could see myself saying, I don't need the money, leave it to grow, or trying to time the market for the sales.

Linton

I have a continuous dividend stream from the natural income of a portfolio of UK shares and foreign funds to help pay for my retirement and also run a separate growth portfolio. The growth portfolio could always top up the income portfolio if required. However over the past 10 years the income portfolio has shown capital growth as well as 5% fairly steady income.

bigfreddiel

Linton wrote: »

I have a continuous dividend stream from the natural income of a portfolio of UK shares and foreign funds to help pay for my retirement and also run a separate growth portfolio. The growth portfolio could always top up the income portfolio if required. However over the past 10 years the income portfolio has shown capital growth as well as 5% fairly steady income.

Could you let us all know what's in each portfolio please, and the thinking behind each investment. Not interested in the actual amounts, just the percentages of each holding.

Cheers fj

bowlhead99

Eco_Miser wrote: »

My question is is it better to select investments with a high dividend, and take the natural yield, or have a more balanced portfolio and sell some each year as needed?

I'm at the accumulation rather than decumulation stage, and will be for a while...

But you are almost preparing to answer your own loaded question when you say is it better to have a 'balanced portfolio'. All conventional logic would say yes, if you have a portfolio that needs to keep you going for a few decades, make it a balanced one.

If it doesn't generate enough 'natural income' because you invested in Apple and they chose to grow their share price massively and keep their tax bills down instead of repatriating their foreign profits to pay dividends... then that's fine, you've still made money, take some out of the investments.

Income funds vs growth funds can do better at different times in an economic cycle. So if you focussed on income only then at some points you could face declines in income as well as declines in capital value as you were not very insulated from market shocks in the types of companies you're invested in, which might be largely correlated with each other.

What you want to avoid in early retirement is losing big swathes of cash by being too heavily in one sector, that you can't recover from. If there has been a flight to equity income and high yield bond funds because of low interest rates, how does the promise of higher interest rates look? Maybe not so good if you have a concentrated portfolio of income payers.

So, I would stay well diversified and enforce my own rules about not being tempted to over-draw on the funds. As mentioned with income funds you would experience drops in income from time to time, and you would live with it. So with a broader portfolio if the share values are down you should try not to still keep taking the same old planned rate, but reduce accordingly, to avoid ransacking the family jewels for this year's consumption.

The counterpoint is that traditionally equity income funds can be quite resilient in dodgy market conditions because if the companies have solid businesses that keep throwing off more cash than they can spend (e.g. utilities, tobacco, oil (erm...!) ) then this bodes well during a downturn. But I would not overrely on a concentrated portfolio of high yielders. The yield of an all-world tracker is under 3% - quite a bit lower than our un-diversified FTSE 100 - so there is no reason to think that most people in most economies are growing and preserving their retirement wealth through yield alone.

Linton

bigfreddiel wrote: »

Could you let us all know what's in each portfolio please, and the thinking behind each investment. Not interested in the actual amounts, just the percentages of each holding.

Cheers fj

25% Income portfolio (ISA)
- 55% 19 UK Shares paying > 4% :10 FTSE100, 9 FTSE250
- 45% 9 Worldwide funds & ITs paying > 4%:
Geographic allocation
62% UK, 19% other Europe
7% US,3 % Lat Am
4% Asia, 4% Australia

Thinking:
Maximum diversification with sustainable dividends to provide steady untaxed income. Am reducing dependence on UK.

75% Growth portfolio (ISAs and drawdown SIPPs)
- 30 managed funds (being consolidated)
Geographic allocation:
16% UK,23% EU, 6% other Europe+Africa+Middle East
28% US,3% Other Americas
15% Emerging Asia.
7% Japan, 2% Australia,
Size allocation
45% Large, 24% Medium, 31% Small

Thinking
Maximum diversification, very long term, > 50% not required for budgetted income so higher risk not a problem. Smaller companies focus, though will remove that for US.

Linton

The advantage of splitting portfolios whilst decumulating is twofold - minimise effort and control.

Withdrawing money by selling funds in a portfolio is a pain. It needs to be tied in with rebalancing and it's not something you really want to do on a monthly basis. If you are concerned about asset allocation in terms of geography, industry, and size balancing all of these become more of a problem. With a focussed income generating portfolio everything happens automatically. The ISA provider pays down automatically into your current account either by dividend or monthly so you just need to look at the portfolio annually.

The other reason for having separate portfolios is control. I believe each investment should have a clear purpose. If it consistently fails to achieve the purpose then it goes. At the strategic level one can base the target asset allocation on the objective. For example US shares generally do not pay high dividends so one doesnt need many of then in an income portfolio whereas they are essential for a growth portfolio. Conversely a sector like property may have a limited role in a growth portfolio, but it can provide a nice steady income. Designing and managing a portfolio is much easier if the portfolio has a single objective.

bowlhead99

That makes sense and thanks for sharing, a good perspective.

But it assumes you have a big enough pot to get your month-to-month retirement income from only one portion of the portfolio. For someone who has £400k and needs £16k a year from it, they are going to need to go 'all income' or have a balanced portfolio and do some selling.

The option of having a £400k income portfolio generating the £16k AND a separate growth portfolio that you don't need to take income from or touch very often because touching the portfolio is a pain which you don't want to go through each month, simply isn't there for a lot of people.

Linton

bowlhead99 wrote: »

That makes sense and thanks for sharing, a good perspective.

But it assumes you have a big enough pot to get your month-to-month retirement income from only one portion of the portfolio. For someone who has £400k and needs £16k a year from it, they are going to need to go 'all income' or have a balanced portfolio and do some selling.

The option of having a £400k income portfolio generating the £16k AND a separate growth portfolio that you don't need to take income from or touch very often because touching the portfolio is a pain which you don't want to go through each month, simply isn't there for a lot of people.

In that example where one is at the edge of sustainability having a general purpose portfolio seems a little risky. One could think along the lines of say £300K in a focussed growth portfolio and £100K in relatively stable bonds/property/absolute return funds etc or even some cash. Sell a safe-ish £1333 monthly and rebalance between the two portfolios annually. The advantage is that you overall may have the same asset allocation as in the single portfolio but you have the ability to choose investments whose effectiveness for your puposes you can measure. It also gives you the choice of precisely moving along the high risk/ lower risk spectrum.

bowlhead99

That makes sense, effectively having a 'near cash' portfolio which is the one you actually pull money out of and holds bonds and property or AR, but fed on a longer term basis by your broader portfolio which is doing the growth.

Thrugelmir

Eco_Miser wrote: »

My question is is it better to select investments with a high dividend,

Shares yield a high dividend for a reason. Buying them because they are high is not a reason.

dunstonh

My question is is it better to select investments with a high dividend, and take the natural yield, or have a more balanced portfolio and sell some each year as needed?

Either method is viable. Using some growth allows you to utilise the CGT allowance and effectively have tax free income on that bit.