Ideas for your Income Portfolio

bostonerimus

Linton said:

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.

In the US funds are not specifically designated as accumulation or income, you just instruct your platform whether to reinvest dividends, interest and capital gains distributions or deposit them to a cash account. US funds are also required to distribute a certain amount of capital gains each year, but it's only an issue outside of retirement wrappers as you have to deal with the tax. The natural yield of my portfolio is around 3% (mostly from dividends) which means that it would work very well for me as an "income portfolio", but that natural yield gets ploughed back in each year. At some point I will have to start taking income from retirement accounts because of tax rules and planning.

bostonerimus

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.

That's how I've organized my portfolio, but I have a high percentage of equities because I use my DB pension to replace a lot of my fixed income allocation and have the diversity of rental income too. I keep around 24 months of cash on hand for cash flow, convenience and emergencies, and quite frankly, because I can easily afford it. It can be psychologically difficult for some to have maybe 10% of their portfolio sitting in cash when they organize their finances for total return and loose the regular and reliable cash injection from wages.

dunstonh

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.

I've used total return since the 90s.   With people going through the dot.com period, credit crunch and CV (the big 3) and drawn out successfully through all of those with their capital worth more than today.    However, I do agree that you do see some people that think the last 10 years as to how it is normally.
Predicting markets is usually futile but I do believe that low risk investors are going to find the next decade or two very difficult.     Low risk investors have got away with much better than typical returns for over a decade and that needs to unwind. 

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.

As you said earlier, we seem to be talking about similar themes.   Historically HYP would typically mean a high UK equity bias because that was where the high yields were.   If you can build the yields in a diversified global spread then you are covering periods when one country/region or sector falls off a cliff.

I suspect your portfolio is not built that differently from a total return portfolio apart from a greater focus on yield.

As I have said before, there are different methods to build portfolios. Each with its pros and cons but the most important thing is to have structure and process.  

bostonerimus

Deleted_User said:

NedS said:

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.

Well, another approach in your situation would be to keep part of the capital in cash (or near-cash), and just spend that part down over the 10 years; and meanwhile invest the remainder without stretching to reach a high yield. E.g. designate 30% to be spent down at 3% per year; meanwhile investing the other 70% at a lower yield e.g. 3%, which would give you another 2.1.% to spend; for a total of 5.1% to spend each year.

One advantage of this method being that your choice of investments would not be so limited by a target yield. With that broader choice, and being able to include more "growthy" investments, and taking a lower yield from investments, there would be a good chance of capital appreciation on the 70% making up for the 30% being spent.

Many people have the idea that spending capital, rather than income, is bad. But they're wrong!

Reaching for high yield in the near term is taking on extra risk early in retirement and that shouts "sequence if return risk". I'd far rather take a long term total return approach and spread the risk out more evenly over time as you suggest.

NedS

NedS said:

NedS said:

I've recently been looking at adding some renewables as there seem to be some great yields available but it appears I'm late to that party and many of the more popular trusts are already trading at hefty premiums that I'm not prepared to pay. I had looked at popular options in the sector such as Greencoat UK Wind (UKW), Bluefield Solar Income (BSIF) and Gresham House Energy Storage Fund (GRID) but they all look pricey. I'm currently watching Gore Street Energy Storage Fund (GSF) with a 6.5% yield trading at a small premium due to a current share offering priced at 102.0 yet shares on the open market are still trading at 106-107. If they dip a little closer to 102 I think I'll add some.

I picked up Gore Street Energy Storage Fund (GSF) a few days after posting this at 102.8p (6.8% trailing yield), and today added NextEnergy Solar Fund (NESF) at 7% yield and only a small premium to NAV (and was delighted to discover there was no stamp duty to pay). I'm also currently watching Foresight Solar Fund Ltd (FSFL) and JLEN as potential buys for the income portfolio. I'm hoping these don't have much further to fall after relatively large falls during the last 18 months, and offer a reasonable entry point.

Update:

I seem to have timed my purchases of GSF and NESF well, both are up slightly on purchase price paid. I think there are currently some attractive income opportunities in this space as valuations fall from previous highs.

I've recently added BSIF after their share offer at 119.7p just in time for the 3rd dividend later this week, at a forward yield of 6.67%

I'm still watching JLEN (down a further 6%) and probably should have bought when the price dipped to 97.2p (7% yield) a month ago. Price is now at 99.1p so will probably look to add JLEN in the next few weeks (I think the price has probably bottomed out for now, even at a 7.5% premium to NAV, helped by the near 7% yield).

I've been looking at some debt funds (e.g, TFIF), but I'm not convinced now is the right time to add. Same with high yield corporate bonds, so I'm waiting for a better opportunity to add these to the portfolio for now.

Strategy:

My strategy is to build an income portfolio within my SIPP to provide an income matching my tax free allowance (£12570) when I retire in a few years. The income portfolio will comprise around 2/3rds of the SIPP (based on current valuations), with the remaining 1/3rd invested in a growth strategy. Additional monthly money added to the SIPP over the next few years before retirement will be added to the growth side making the ratio closer to 60:40 or 50:50 assuming growth performs better. This discussion thread is only interested in the income part of the portfolio.

The plan for the income portfolio is to target a minimum 5% yield from a diversified portfolio of income focused assets, required to meet my income needs (supplementing other income streams). Achieving sustainable income growth to match inflation is important, so additional income in excess of 5% will be reinvested to help achieve sustainable income growth. For example, recent renewables investments are achieving 6-7% yields so the additional dividend income can be reinvested to help offset inflation. Investments that offer sustainable increases in income are desirable, preferably inflation-linked. For example, CTY IT (my main equity holding) has a long history of raising dividends, matching inflation. Likewise, recently added renewables funds have income streams that are inflation linked and offer progressive dividend policies. I'm still building the income portfolio which currently stands at a predicted income of £5700 so still looking to add suitable investments, and until I retire, all income is reinvested.

Thrugelmir

The issues for "renewables" is the long term forecast for cheaper power prices and the increasing levels of corporation tax. Some investments in the space aren't as attractive as they were 2 years ago. 

NedS

Thrugelmir said:

The issues for "renewables" is the long term forecast for cheaper power prices and the increasing levels of corporation tax. Some investments in the space aren't as attractive as they were 2 years ago. 

Agreed, and "shocks" such as the rise in corporation tax have served to be a double-whammy hitting both income streams and NAV, but I feel there is value to be had now these events are priced in.

Given the long term gains from equity are around 7% avg, and we have seen a decade of stellar growth, I feel income generating assets with yields of 5-7% are not unattractive moving forward in a decade which may see stagnation in growth stocks, assuming they are able to hold on to their lofty valuations.

JohnWinder

Linton said:

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.

I wonder if you can give an example, as this seems counter-intuitive. If one chose a global stock and bond tracker for total return, what portfolio focused on income might be more diversified than that?

Thrugelmir

JohnWinder said:

Linton said:

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.

 If one chose a global stock and bond tracker for total return, what portfolio focused on income might be more diversified than that?

Bonds and global equities are highly correlated. As an example, if interest rates were to rise both would value in value. 

JohnWinder

NedS said:

 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?

It's a fine strategy, but it works because the pot is so big that you would be withdrawing less than a sustainable minimum to protect you from ever running out of money. You could have a portfolio focused on growth, income, large companies, foreign companies, you name it (almost!) and if you draw down only enough that would have come from dividends and bond coupons in a more diverse portfolio you have a permanently sustainable portfolio. I think a hazard with an income focus, I won't say obsession, arises if one doesn't have a diverse enough collection of income stocks/bonds. Twenty income stocks just wouldn't cut it for me, after what happened to Eastman Kodak, General Electric, JC Penny and their ilk. Five hundred, and I think you're laughing.