Ideas for your Income Portfolio

JohnWinder

Linton said:

 One needs both growth and income, particularly in retirement.  Clearly when investing for a pension in 40 years time income is rather less important.

I don't always get this distinction between income and growth. They're both manifestations of the profitability of the business it seems. Either the company pays a dividend with its surplus, or it retains it to grow the business. Equally profitable businesses of the same size (etc) would be as useful to me if they paid a dividend or retained it to increase the value of the stock, whether I'm accumulating or in drawdown, n'est pas? This assumes I have the capacity to reinvest dividends or sell stock, and either are not burdensome. What am I missing?

MaxiRobriguez

JohnWinder said:

Linton said:

 One needs both growth and income, particularly in retirement.  Clearly when investing for a pension in 40 years time income is rather less important.

I don't always get this distinction between income and growth. They're both manifestations of the profitability of the business it seems. Either the company pays a dividend with its surplus, or it retains it to grow the business. Equally profitable businesses of the same size (etc) would be as useful to me if they paid a dividend or retained it to increase the value of the stock, whether I'm accumulating or in drawdown, n'est pas? This assumes I have the capacity to reinvest dividends or sell stock, and either are not burdensome. What am I missing?

Not a lot - preference on if you trust the profits being made with the business itself or in your pocket to do other things with.

Personally I prefer the dividend, but that is also influenced by the fact that dividend paying companies tend to have a more steady and predictable cash flow, and on the whole I prefer to invest in those companies.

JohnWinder

NedS said:

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.

A switch at that pont seems unnecessary to me. Whichever of either approach you take, the one you described or a 'total market' approach from start to finish (don't try to separate the 'income' assets from the 'growth' assets or agonise over the ones that seem to be both, or worse pay someone to make that distinction for you), then you want a portfolio that will give you the best return for the amount of risk you're comfortable to take. The way to do that, with the most certainty, is to choose the most diverse portfolio of stocks and bonds (or real estate etc), not to try to pick out the ones that will win in this period and the others that will win in the latter period, I would have thought.  I'll acknowledge that using your approach with well diversified strategies for the two periods in question would likely be as effective as the approach I'm suggesting, but why bother?

JohnWinder

MaxiRobriguez said:

Not a lot - preference on if you trust the profits being made with the business itself or in your pocket to do other things with.

Personally I prefer the dividend, but that is also influenced by the fact that dividend paying companies tend to have a more steady and predictable cash flow, and on the whole I prefer to invest in those companies.

Well, I get that. And if the dividend stocks are in their hundreds, not dozens, then there's probably not much difference. But you do lose the benefit of some diversification for not holding thousands of stocks, and you might pay a bit more to have someone choose the dividend stocks for you (hoping we're not meant to pick them ourselves).

ColdIron

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.

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?

Infrastructure, property, commodities, private equity, perhaps high yield fixed interest?

JohnWinder

bostonerimus said:

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.

Why the difference from the UK? Which arrangement is more useful to the investor?

Prism

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.

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?

I don't split my portfolio into income and total return however its fair to say that a part of my portfolio produces significantly more income than the rest. That part it still technically either equity or bonds but it emphasizes certain sectors that get little coverage in a standard global market cap.

REITs, Infrastructure trusts, renewable energy trusts and royalties are all technically equity but are barely represented in a traditional equity allocation but pay higher dividend/cash income.

Alternative debt, P2P and high yield bonds are barely in a traditional bond allocation.

All could be considered as diversifiers but none of it is designed to create a higher return.

JohnWinder

ColdIron said:

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.

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?

Infrastructure, property, commodities, private equity, perhaps high yield fixed interest?

Let's cross out high yield fixed interest, since I nominated bonds, and those are bonds by the sound of it.

Now I'll choose a portfolio for total return which, well diversified, holds stocks, bonds, infrastructure, property and commodities and private equity. And if you think I've changed the goal posts, my original bonds are clearly income type assets compared with four you suggested, yet they belong in a total return portfolio.

Thrugelmir

JohnWinder said:

Linton said:

 One needs both growth and income, particularly in retirement.  Clearly when investing for a pension in 40 years time income is rather less important.

I don't always get this distinction between income and growth. They're both manifestations of the profitability of the business it seems. Either the company pays a dividend with its surplus, or it retains it to grow the business. Equally profitable businesses of the same size (etc) would be as useful to me if they paid a dividend or retained it to increase the value of the stock, whether I'm accumulating or in drawdown, n'est pas? This assumes I have the capacity to reinvest dividends or sell stock, and either are not burdensome. What am I missing?

Being a growth stock has no bearing on the underlying profitability. Tesla is the stand out example. Tesla grows by issuing more equity stock and selling it into the market to raise capital to fund expansion. Every capital raise as a consequence dilutes existing shareholders. Amazon was loss making for over a decade. 

Linton

JohnWinder said:

Linton said:

 One needs both growth and income, particularly in retirement.  Clearly when investing for a pension in 40 years time income is rather less important.

I don't always get this distinction between income and growth. They're both manifestations of the profitability of the business it seems. Either the company pays a dividend with its surplus, or it retains it to grow the business. Equally profitable businesses of the same size (etc) would be as useful to me if they paid a dividend or retained it to increase the value of the stock, whether I'm accumulating or in drawdown, n'est pas? This assumes I have the capacity to reinvest dividends or sell stock, and either are not burdensome. What am I missing?

I am focussing on what you as an investor require, particularly in retirement.  To minimise stress you need as steady a source of income as possible at least to cover the basics.  You also need the reassurance that the income is sustainable in the face of possibly significant inflation which requires sufficient capital growth.

Each requirement is best provided by different portfolio allocations. The problem is how does one structure one's investments to provide both.