Income funds?

k6chris

Most of my pension comes from a small DB plan (which covers my basic needs), but I have some money in a SIPP.  I have come to the conclusion I don't like the thrill of the stock market ups and downs and that having a plan where I can focus on the dividend (etc) income being paid will help me worry less about underlying fluctuations.  

1) Is this a really dumb idea??

2) Am I alone in this??

3) Is there such a thing as an ideal income portfolio???

Thanks 

dunstonh

1) Is this a really dumb idea??

It's not dumb, but it's not going to achieve your objective.    Dividends are part of the total return.  The unit prices will still fluctuate  and fall during negative periods.

3) Is there such a thing as an ideal income portfolio???

No.    

masonic

Some people do switch to an income focused portfolio in retirement and live off the natural yield. It does tend to bias towards certain types of company and probably wouldn't deliver the best outcome overall, but it's a valid approach.

Certain investing publications would list portfolios generating a certain level of income per £100k, either based on investment trusts or open ended funds. I don't know if they still do or how successful those portfolios were.

It is not something I would do.

tacpot12

It's not a really dumb idea. You are not alone.

I'm retired and I have all my personal pension investments and ISA investments in income funds. (I also have a couple of small DB pensions that haven't started paying yet and a rental property). 

I like the income route as it is less affected by volatility. I've invested mainly in Investment Trusts (ITs) because they can hold reserves and then use these reserves to maintain dividend payouts if the dividends they receive dry up. I saw this during the Covid-19 pandemic where the ITs did maintain their dividend levels (more or less). I do have a couple of EFTs that potentially offers a lower cost route to income returns. My portfolio returns are a yield of 4.6% (after charges), and capital growth of an average 1.5% over the last 7 years.

As to whether there is an ideal income portfolio, I haven't found it yet. My view is that you want diversification of sources of income, so I have mainly equities, but also some bond funds/trusts, and one property EFT. 

Altior

An investment trust is the best option if you're looking for consistent yield, regardless of the underlying NAV, ie smoothing out fluctuations. 

There is still inherent risk, but there are several ITs with a long successful heritage. 

A good place to start your research in my view:

Dividend Heroes | The AIC

InvesterJones

Altior said:

A unit trust is the best option if you're looking for consistent yield, regardless of the underlying NAV, ie smoothing out fluctuations. 

There is still inherent risk, but there are several ITs with a long successful heritage. 

A good place to start your research in my view:

Dividend Heroes | The AIC

I presume you mean investment trust, not unit trust. Unit trusts are open ended, like OEICs.

poseidon1

I have exactly the Sipp portfolio you describe. Not because I am in anyway concerned about the vicissitudes of equity stock market investing but because it makes more sense to me to have a constant income stream to reinvest in either more bonds or equities as I deem fit and/or facilitate drawdown.

My split ( currently) is roughly 45% bonds/gilts/infrastructure and 55% equity across a variety of individual stocks and shares as well as actively managed funds and investment trusts. 

Equity income yields vary between 3.5% to 8% with bonds 4.375% to 12%.  The generous income stream is to assist with hassle free income drawdown when the time comes ( no decision making  needed as to what and when to sell to fund  periodic income payments)

  All but a small number of tech heavy investment trusts are therefore income producers. The split however is not set in stone, and can vary as the economic and geopolitical climate changes.

 However I am already 67  and my approach  is probably fairly unusual on this forum in actively managing the portfolio  ( as my retirement 'job' ) rather than relying on passive tracker funds/etfs which seems to be the majority preference here.

There are of course Equity and bond tracker funds/etfs which distribute income although unlikely any where near the high yields I seek,  but may work for you at your early stage of retirement on an initial set and forget basis. 

However as to the concept of an ideal 'income portfoilio'  difficult to see how that can exsist as an objective entity, since everyone's appetite for risk understandably varies, and even your own might change as years pass. 

No doubt those who utilise index trackers on a  income distribution basis can be more helpful with what they have chosen to fulfil that objective.

Altior

InvesterJones said:

Altior said:

A unit trust is the best option if you're looking for consistent yield, regardless of the underlying NAV, ie smoothing out fluctuations. 

There is still inherent risk, but there are several ITs with a long successful heritage. 

A good place to start your research in my view:

Dividend Heroes | The AIC

I presume you mean investment trust, not unit trust. Unit trusts are open ended, like OEICs.

Yup, thanks, dozing.

Bostonerimus1

k6chris said:

Most of my pension comes from a small DB plan (which covers my basic needs), but I have some money in a SIPP.  I have come to the conclusion I don't like the thrill of the stock market ups and downs and that having a plan where I can focus on the dividend (etc) income being paid will help me worry less about underlying fluctuations.  

1) Is this a really dumb idea??

2) Am I alone in this??

3) Is there such a thing as an ideal income portfolio???

Thanks 

Income can come from dividends, interest, capital gains or return of principal. Historically dividends were often more important than growth, but with the massive run up in markets at the end of the 20th century and the beginning of the 21st growth has taken over in many portfolios, especially when in the accumulation phase. Dividends tend to be more reliable than growth and you might be well served by a multi-asset fund that concentrates on dividend companies and a some bonds or just an equity income fund and a short to mid-term bond fund so you don't have too much interest rate risk.

Linton

We use income funds in retirement to generate about 1/3rd of our normal expenditure in addition to SP, annuities, and a small DB pension .  There has been no need or wish to sell investments for cash for normal living expenses for most of my 20 retirement years. Some points:

1) Income funds on their own are not sufficient.  Income from dividends should be largely inflation linked over the long term, though not necesarily to UK inflation.  Income from fixed interest almost certainly wont.  Also you may be using fixed rate annuities. Therefore you will probably need to increase the size of your income portfolio over time.  This implies use of a parallel growth portfolio of an appropriate size.

2) You need a cash buffer to smooth the income payments over the year as some may be yearly, biannually, quarterly or monthly.  More importantly you need a significant cash holding for major one-off expenses.  Ours is replenished largely by taking more income than needed for normal expenses and saving the excess.

3) Your income sources should be very highly diversified.  In particular you need both equity and fixed interest. You can get higher yields from fixed interest but there will be no inflation matching. It should also be spread world-wide.  Asian equity income is currently over 6% as are many sources of fixed income. US income is only available in worthwhile amounts through fixed interest and "maximiser" income funds.

The IUKD UK dividend index ETF shows the dangers of poor diversification.  In 2008 it was highly invested in banks because they were large companies paying high dividends. And then their prices crashed by more than 50% and dividends ceased.  The fund price has still not recovered from its pre 2008 high, neither have the dividends.

wmb194

Linton said:

We use income funds in retirement to generate about 1/3rd of our normal expenditure in addition to SP, annuities, and a small DB pension .  There has been no need or wish to sell investments for cash for normal living expenses for most of my 20 retirement years. Some points:

1) Income funds on their own are not sufficient.  Income from dividends should be largely inflation linked over the long term, though not necesarily to UK inflation.  Income from fixed interest almost certainly wont.  Also you may be using fixed rate annuities. Therefore you will probably need to increase the size of your income portfolio over time.  This implies use of a parallel growth portfolio of an appropriate size.

2) You need a cash buffer to smooth the income payments over the year as some may be yearly, biannually, quarterly or monthly.  More importantly you need a significant cash holding for major one-off expenses.  Ours is replenished largely by taking more income than needed for normal expenses and saving the excess.

3) Your income sources should be very highly diversified.  In particular you need both equity and fixed interest. You can get higher yields from fixed interest but there will be no inflation matching. It should also be spread world-wide.  Asian equity income is currently over 6% as are many sources of fixed income. US income is only available in worthwhile amounts through fixed interest and "maximiser" income funds.

The IUKD UK dividend index ETF shows the dangers of poor diversification.  In 2008 it was highly invested in banks because they were large companies paying high dividends. And then their prices crashed by more than 50% and dividends ceased.  The fund price has still not recovered from its pre 2008 high, neither have the dividends.

Back then IUKD had the dumbest mechanical setup i.e. buy 50 FTSE350 companies with the highest trailing yields with no thought as to why those yields were so high. So it anlways ended up owning stressed companies that were about to cut their dividends or, as it turned out, go bust. 

IIRC its approach has been modified to be less stupid but from its current portfolio it still looks pretty dumb. For me it’s an example of how passive investing doesn’t always work; you need to watch out for how they select.