Income investing - newbie question

Linton

amanda1024 said:

For a guaranteed income around 5% (so £420 a month) you might want to look at savings accounts instead. Plum's cash ISA pays 5.17% at the moment, with interest available monthly (https://www.moneysavingexpert.com/savings/best-cash-isa/). There are also quite a few non-ISA savings accounts paying over 5%, although many of the fixed term accounts only pay interest annually/at maturity (https://www.moneysavingexpert.com/savings/savings-accounts-best-interest/) Regular savings accounts give better rates but are limited in how much you can add each month (so best approach is to put a chunk of cash in an easy-access savings account and transfer over); they vary on whether the interest is paid monthly or annually (https://www.moneysavingexpert.com/savings/best-regular-savings-accounts/).

Depending on your age you could also consider an annuity - £100k could buy a 65 year old an annuity of £6k, i.e. £500/month (according to L&G https://www.legalandgeneral.com/retirement/pension-annuity/pension-annuity-calculator/)

For a higher income you're trading potential gains for certainty - the higher the potential income, the lower the certainty you'll actually get it.

I agree that savings accounts and annuities have their place in generating income.  Neither are completely ideal:

Interest rates from savings are only guaranteed for up to 5 years by which time they could change substantially so whether you will achieve 5.17% from an ISA in 5 years time is completely unknown.   We could be back to <1%.

Annuities have the disadvantage of inflexibility in that you cannot access the capital for one-off large expenditure. So I suggest they are best suited to only meeting essential needs.

The best solution is, I think, a mixture of annuities, growth investment, medium term income investing and short term savings, depending on your specific requirements.

Gary1984

I get the appeal of dividends just appearing in your account, but I don't really see the difference between a company paying a 5% dividend or paying no dividend and you selling 5% of your holding. The value of shares held and cash in your account at the end would be the same in both scenarios wouldn't it? (ignoring fees).  But with selling shares you have a bit more control and can vary the proceeds based on your required income.

That and the types of shares that pay high dividends lack the diversification of say a global equity tracker. 

Linton

Gary1984 said:

I get the appeal of dividends just appearing in your account, but I don't really see the difference between a company paying a 5% dividend or paying no dividend and you selling 5% of your holding. The value of shares held and cash in your account at the end would be the same in both scenarios wouldn't it? (ignoring fees).  But with selling shares you have a bit more control and can vary the proceeds based on your required income.

That and the types of shares that pay high dividends lack the diversification of say a global equity tracker. 

A couple of differences between receiving a 5% dividend and selling 5% of your holding:

1) Company directors are highly motivated not to cut the dividend - shareholders dont like it.  So dividends in £ terms are much more stable than share prices.
2) Companies that produce good dividends tend to be boring - limited potentially risky growth but stable and relatively highly profitable.  Better to rely on such companies for essential income than on high tech companies and Tesla's.  The risks inherent in the latter surely make them better for your long term growth investments.  Horses for courses.


I am not advocating putting all your money into dividend/interest investments, just the money you need to generate basic ongoing income.    Your basic needs are unlikely to vary greatly over the short o medium term.  At the strategic level, say every 5-10 years you may wish to change your balance but that is easily achieved by buying or selling part of your income tranch.

In any case an income portfolio can be highly diversified in terms of geography, asset class, industrial sector etc.  It's more a shift in the value/growth balance rather than a severe restriction on diversification.

ColdIron

Gary1984 said:

I get the appeal of dividends just appearing in your account, but I don't really see the difference between a company paying a 5% dividend or paying no dividend and you selling 5% of your holding. The value of shares held and cash in your account at the end would be the same in both scenarios wouldn't it? (ignoring fees).  But with selling shares you have a bit more control and can vary the proceeds based on your required income.

That and the types of shares that pay high dividends lack the diversification of say a global equity tracker. 

One often overlooked factor with periodic sales is the psychological factor of selling when valuations are down. IFAs with a total return strategy can do this dispassionately and it's an easy strategy to justify. It's harder for individuals, we're all human. This could lead to you delaying sales or perhaps selling less, both of which would disturb your income stream. A decent cash buffer can help but quite frankly, now that I'm retired, I can do without the decision making

But it's not a binary issue, you can take more than one approach. I maintain separate portfolios for competing objectives and they are invested very differently. It helps me to focus on each goal

My income portfolio contains dividend producing investments for general known expenses and the dividends hold up better than prices. I don't have to lift a finger and can get on with my life. If my total return is lower, and it probably is, then that's the price I pay for a pleasant life. I take taxis more often than I used to and fewer buses and trains as well

However I can't ignore growth. That portfolio only has 4 or 5 index trackers so I get the greater diversity, the Amazons and Teslas of this world, and don't have to do much about it either

I want robustness and flexibility so that I have options for my future. I haven't had to use the growth portfolio yet but I could move some of it into my income portfolio if needed. I could use it for big ticket items, move house, round the world trip, an unforeseen disaster or whatever. Finally it could be used for later life care. It might just get inherited

And then I have cash savings as a buffer and as an easy to access source for smaller emergencies and impulse purchases such as a long haul flights in business class

There are many ways to skin a cat but this one works for me. The right tools for the job and all that good stuff

cloud_dog

ColdIron said:

Gary1984 said:

I get the appeal of dividends just appearing in your account, but I don't really see the difference between a company paying a 5% dividend or paying no dividend and you selling 5% of your holding. The value of shares held and cash in your account at the end would be the same in both scenarios wouldn't it? (ignoring fees).  But with selling shares you have a bit more control and can vary the proceeds based on your required income.

That and the types of shares that pay high dividends lack the diversification of say a global equity tracker. 

One often overlooked factor with periodic sales is the psychological factor of selling when valuations are down. IFAs with a total return strategy can do this dispassionately and it's an easy strategy to justify. It's harder for individuals, we're all human. This could lead to you delaying sales or perhaps selling less, both of which would disturb your income stream. A decent cash buffer can help but quite frankly, now that I'm retired, I can do without the decision making

This!

My main thoughts tend to flow towards my partner who has zero financial interest, and how they would 'manage' the situation.  Fortunately for us the vast majority of our income will be made up from guaranteed sources (DBs / SPs), and even though we have that high degree of comfort the whole idea of not having to think about what actions are required to service that other c. 10%+ income is very appealing from the 'run over by a bus' situation, and also not having to factor in should I sell some, should we use some cash, etc, etc.

I have to admit that I was intended to just leave the money invested in 100% equities and manage future situations accordingly (because we will be in a relatively fortunate/stable income position), but, mainly my thoughts are around how my partner would know / understand / feel about managing the finances in that scenario; much cleaner, less stressful for them just to continue to receive dividends!

gm0

@Linton  I too like the idea of considered income investing in deaccumulation. 

My objection to "income investing" as a retirement planning shortcut - is the portfolio change it seems to bring bundled with it.  i.e. the shift towards dividend/high dividend/high yield and away from zero dividend growth stocks.  Whatever one thinks about the meg-caps and US and technology stocks and their future from now.  Focusing on tilting up/down or avoiding these should be a quite deliberate and separate portfolio selection decision from the income mechanics. 

And as far as I understand it from reading around and fund fact sheets - the portfolio shift is quite often embedded into the stock selection of some of the fund offerings labelled up as "income".  So I am talking about funds of dividend champion stocks or high yield focus stocks and not bond ladders or gilts/FI or other assets with fixed yield. 

In my own portfolio which is planned on a total return/buffered income, 12-18 month rebalancing, no growth asset sales in year approach.  And I do use inc units quite a bit regardless of the equity fund investment regional or other purpose.  This to at least partly refill my income buffer cash during the year.  Any MMF holdings do likewise.  This contributes to the sequence risk mitigation from the less volatile asset pool to be used for avoiding equity sales when they are subject to a violent period of downward volatility.  Not selling regularly in year is deliberate to be immune to flash crashes and brief (like 2020) dip and returns lining up with monthly sales.  Nothing gets sold until I go back to rebalance.  The timing and nature of rebalancing are a 12-18 month decision at minimum.

I think it is quite possible but not trivial - to arrange a "total return" approach to deaccumulation pensions with any portfolio shape  and tilt to the actual investments as may be desired.  Which could be value, or "income" dividend champion if that's your market view.  I think the disadvantage of this formulation is complexity added.  And the advantage over "income investing" as a shortcut is that it is porftolio neutral. 

JohnWinder

'I do use inc units quite a bit ... This to at least partly refill my income buffer cash during the year.  This contributes to the sequence risk mitigation..... for avoiding equity sales when they are subject to a violent period of downward volatility.'

No doubt, such 'forced' sales would be painful and we're all about reducing pain, but I think the riposte to 'selling in a crash is bad' is the growth you got and will get outside the crash period. And we should expect less of such growth with 'dividend stocks'.  There are some swings and roundabouts here.

Accepting the 'dividends is good' approach for a moment, might a sensible approach be to choose something tracking a high yield index like the FTSE global high yield stocks index?  Cheaper than an active fund doing the same thing, more diversified, less manager risk, cap weighted. That usually points to a good choice, but there are millions of indexes and they can't all be good ones, so do we know how this index might serve us?

Linton

gm0 said:

@Linton  I too like the idea of considered income investing in deaccumulation. 

My objection to "income investing" as a retirement planning shortcut - is the portfolio change it seems to bring bundled with it.  i.e. the shift towards dividend/high dividend/high yield and away from zero dividend growth stocks.  Whatever one thinks about the meg-caps and US and technology stocks and their future from now.  Focusing on tilting up/down or avoiding these should be a quite deliberate and separate portfolio selection decision from the income mechanics. 

And as far as I understand it from reading around and fund fact sheets - the portfolio shift is quite often embedded into the stock selection of some of the fund offerings labelled up as "income".  So I am talking about funds of dividend champion stocks or high yield focus stocks and not bond ladders or gilts/FI or other assets with fixed yield. 

In my own portfolio which is planned on a total return/buffered income, 12-18 month rebalancing, no growth asset sales in year approach.  And I do use inc units quite a bit regardless of the equity fund investment regional or other purpose.  This to at least partly refill my income buffer cash during the year.  Any MMF holdings do likewise.  This contributes to the sequence risk mitigation from the less volatile asset pool to be used for avoiding equity sales when they are subject to a violent period of downward volatility.  Not selling regularly in year is deliberate to be immune to flash crashes and brief (like 2020) dip and returns lining up with monthly sales.  Nothing gets sold until I go back to rebalance.  The timing and nature of rebalancing are a 12-18 month decision at minimum.

I think it is quite possible but not trivial - to arrange a "total return" approach to deaccumulation pensions with any portfolio shape  and tilt to the actual investments as may be desired.  Which could be value, or "income" dividend champion if that's your market view.  I think the disadvantage of this formulation is complexity added.  And the advantage over "income investing" as a shortcut is that it is porftolio neutral. 

If you are properly diversified, income investing should not make a great difference to overall
allocations. You could see it as putting the income producing investments you could be holding anyway into a separate pot and managing them differently from those you need for long term growth.

This has the advantage that you can pretty much ignore market fluctuations in the short/medium term. The income pot carries on regardless and the growth pot is of no immediate concern since in the short/medium term it will have zero impact on your on-going income.

JohnWinder

If a dividend focussed asset, like a tracker of high yield stocks, and a growth focussed asset are suitable components for a retirement income stream which offers some sequence of returns risk reduction, couldn't the growth focussed stocks simply be a tracker of the remaining stocks which didn't make it into the high yield fund? Thus, you'd hold the equivalent of a total market fund. 

It seems to me if that two fund approach would work satisfactorily for a sensible withdrawal rate like the 4% rule, then the one fund total market would work similarly whether you lived off the dividends or selling capital.

aroominyork

I'm retiring in the next few years and OH is about to retire retired so we'll slowly start using savings/investments. I always assumed we would invest to maximise growth and sell units, rather than buying income-generating investments. It makes logical sense but since plenty of people invest for income it must be a sound strategy for some people and in some circumstances. Can someone point me to a good source of info to read up on this and make the right decision for ourselves?