Ideas for your Income Portfolio

bostonerimus

There's nothing wrong with dividends, but rather than buying individual dividend stocks I'd use a fund that concentrates on dividend stocks and maybe back it up with some inflation linked bonds if you are worried about inflation. There are plenty of funds/trusts that deal in this style of investing, but you can put something together yourself. Of course, if you have something like a DB pension then income investing might not be necessary and total return is more appropriate. Even if you don't have regular income, total return is still a popular approach as the bond markets don't look very attractive right now. 
In my case I have a DB pension so dividends and interest are not a big priority, but I tend to be biased towards large cap and so my equity trackers do produce around 2% in dividends each year which is reinvested. I have one classic old income fund that I mostly use for my small bond allocation. It's US Vanguard Wellesley (so not available in the UK) and has 40% large cap dividend stocks and 60% Government and investment grade bonds and the distributions last year were 4.2%. Something of a similar style would be ok in most income portfolios, although maybe a higher percentage of dividend stocks would be better today.

dunstonh

That is a matter of opinion. I'm not retired yet, but I'm wondering how well I would have slept at night last year if I were dependent upon a drawdown strategy and my portfolio lost 50% in less than a month in the covid crash.

I doubt many dropped 50% during the Covid period.  100% equity was about 35% down and very few people run portfolios of 100% equity in retirement.

Conversely, my income investments carried on paying a steady dividend yield throughout and many have increased their payouts this year in line with inflation or above.

Although, during market downturns, the unit price would still drop.

If I can achieve the income I need from income alone, without having to ever sell any assets, how is that not a good strategy if it meets my investment needs?

If you can achieve your objective that way then fair enough.  It may not be optimal but if it works for you then great.    

Sure, a growth and drawdown strategy may have outperformed during the last 10 years (past performance ... ), one could also say it's easy to be wedded to a growth/drawdown strategy at the end(?) of a bull market.

Total return is not the same as growth and drawdown (relying on growth only would probably not be a good idea).  TR is a combination of income and growth.      Income portfolios tend to suffer lower growth and are generally unable to diversify in the same way a TR portfolio can and because of low interest rates, you cannot rely on fixed interest securities to provide the income.  So, you have to go higher risk to achieve a higher yield.

There are a range of investment strategies/methods available and they all have pros and cons.   There is no one best option.

Prism

Some prefer the higher yield dividend paying trusts which do all of the work for you. However they are only doing what you could do yourself - they need to sell holdings, including during market crashes, to pay for the dividends. They also might well not keep up with inflation should it rise significantly. In extreme conditions they would need to reduce or cut the dividend like any other company.

Linton

Prism said:

Some prefer the higher yield dividend paying trusts which do all of the work for you. However they are only doing what you could do yourself - they need to sell holdings, including during market crashes, to pay for the dividends. They also might well not keep up with inflation should it rise significantly. In extreme conditions they would need to reduce or cut the dividend like any other company.

In theory you could run your own dividend fund investing in individual shares  But of course that equally applies to investing for capital gain.  Yet people find it easier, and probably for most more lucrative, to buy a growth fund than take the time and effort to continuously research the market to choose appropriate investments.

Linton

dunstonh said:

.........

Total return is not the same as growth and drawdown (relying on growth only would probably not be a good idea).  TR is a combination of income and growth.      Income portfolios tend to suffer lower growth and are generally unable to diversify in the same way a TR portfolio can and because of low interest rates, you cannot rely on fixed interest securities to provide the income.  So, you have to go higher risk to achieve a higher yield.

There are a range of investment strategies/methods available and they all have pros and cons.   There is no one best option.

We seem to be saying the same thing.  One needs both growth and income, particularly in retirement.  Clearly when investing for a pension in 40 years time income is rather less important.

My line is that if you want long term growth focus on those things that produce growth.  If you want a fairly steady income invest in those things that provide the income.   In practice you may well want both, a steady-ish income to pay your bills and long term growth to handle inflation.  in which case it is easiest to run two totally different portfolios.  Trying to get a steady income from a growth oriented prortfolio is likely to be both less successful and require a lot more effort.  

The problem I have with the term Total Return is that it suggests the objective and measure of success is the return, which requires taking a long term view - short term return being highly volatile.  However if you need income the most important objective is to meet one's requirements in the short/medium term whilst possibly requiring no more in the long term than to ensure your income matches inflation. Dying rich does not seem a compelling objective.

To pick up on another point - a portfolio which focuses on income can be just as diversified as one that focuses on long term return, if not more so.  Income can be gained from a very wide range of world wide investments, often in areas which would not appear if one's objective was Total Return.

NedS

Deleted_User said:

I think one reason some people end up going for a high-income portfolio is because they are aiming to spend a larger percentage of their portfolio value per year, e.g. 5% or 6%. You aren't likely to end up with a portfolio with that sort of yield unless you specifically seek out higher yield investments. Such a high draw rate may or may not be sustainable in practice; and this applies whether you take the high-income approach, or some other method.

That's certainly the case for me, where I need to front load income for a 10 year period between early retirement and DB/state pensions, after which essential spending is covered and I can revert to drawing a more sustainable long-term income to support discretionary spending. At that point, a switch to a growth strategy may make more sense to me for years 65 - 95.

Linton

Deleted_User said:

Linton said:

My line is that if you want long term growth focus on those things that produce growth.  If you want a fairly steady income invest in those things that provide the income.   In practice you may well want both, a steady-ish income to pay your bills and long term growth to handle inflation.  in which case it is easiest to run two totally different portfolios.

.....

I think one reason some people end up going for a high-income portfolio is because they are aiming to spend a larger percentage of their portfolio value per year, e.g. 5% or 6%. You aren't likely to end up with a portfolio with that sort of yield unless you specifically seek out higher yield investments. Such a high draw rate may or may not be sustainable in practice; and this applies whether you take the high-income approach, or some other method.

Another reason is that it can be set up to run from an S&S ISA with the dividends and interest being automatically deposited into your current account as soon as it is received.  Using TR you need to make a decision on what to sell everytime you want some income and manually arrange a transfer.

dunstonh

The problem I have with the term Total Return is that it suggests the objective and measure of success is the return, which requires taking a long term view - short term return being highly volatile.  However if you need income the most important objective is to meet one's requirements in the short/medium term whilst possibly requiring no more in the long term than to ensure your income matches inflation. Dying rich does not seem a compelling objective.

The risk still applies to HYPs.   Go back to pre-credit crunch when HYP was still fashionable (too fashionable IMO), the best yields tended to be heavy in banks and financials.    The credit crunch decimated HYPs and they never recovered.    If you can get the income portfolio to the yield you need without being heavy in one industry, then you can reduce that risk.

The Total Return portfolio would typically use a cash float for 24 months of withdrawals with income from the units/shares topping up that cash float.  At around 2% a year yield on a TR portfolio, you are probably looking at having around 36 months in cash at peak.   When markets are high, you sell units to keep the float higher.   When markets are down, you don't sell any but you let the cash float be used.    The majority of negative periods would be recovered within 3 years.  Extreme ones may not but your float would see you through most periods with lots of room to spare.

Linton

dunstonh said:

The problem I have with the term Total Return is that it suggests the objective and measure of success is the return, which requires taking a long term view - short term return being highly volatile.  However if you need income the most important objective is to meet one's requirements in the short/medium term whilst possibly requiring no more in the long term than to ensure your income matches inflation. Dying rich does not seem a compelling objective.

The risk still applies to HYPs.   Go back to pre-credit crunch when HYP was still fashionable (too fashionable IMO), the best yields tended to be heavy in banks and financials.    The credit crunch decimated HYPs and they never recovered.    If you can get the income portfolio to the yield you need without being heavy in one industry, then you can reduce that risk.

The Total Return portfolio would typically use a cash float for 24 months of withdrawals with income from the units/shares topping up that cash float.  At around 2% a year yield on a TR portfolio, you are probably looking at having around 36 months in cash at peak.   When markets are high, you sell units to keep the float higher.   When markets are down, you don't sell any but you let the cash float be used.    The majority of negative periods would be recovered within 3 years.  Extreme ones may not but your float would see you through most periods with lots of room to spare.

There is no perfect answer. Risk is always an issue.  Theoretically speaking in the very long term Growth and Income should provide much the same returns.  The trouble is that many people seem to think the past 10 years or so of unsustainable tech driven growth is sufficiently long term to have changed the rules.

As always diversification is key - only about 20% of my dividend/interest income comes from traditional UK equity investments.  From Morningstar data the highest % equity sector is Financial Services at 16% closely followed by "Basic materials" at 14%.  Contrast that with my Growth  Portfolio with Technology at 23% and Industrials at 17%.  If anything the income portfolio is more broadly diversified than the Growth one.

 The amount taken as income is set to provide the difference between guaranteed pensions and normal day to day expenditure. The aim is to ensure that in the short/medium term income is stable with minimal need for ongoing management.  Any money required for one-off major expenses comes from cashing-in excess growth as part of rebalancing

bostonerimus

Deleted_User said:

Linton said:

My line is that if you want long term growth focus on those things that produce growth.  If you want a fairly steady income invest in those things that provide the income.   In practice you may well want both, a steady-ish income to pay your bills and long term growth to handle inflation.  in which case it is easiest to run two totally different portfolios.

I think one reason some people end up going for a high-income portfolio is because they are aiming to spend a larger percentage of their portfolio value per year, e.g. 5% or 6%. You aren't likely to end up with a portfolio with that sort of yield unless you specifically seek out higher yield investments. Such a high draw rate may or may not be sustainable in practice; and this applies whether you take the high-income approach, or some other method.

But high yield often comes with high risk too.