The impact of inflation - yikes!

Pat38493

https://forums.moneysavingexpert.com/discussion/comment/82109600#Comment_82109600

The question though is whether those kind of yields would be maintained during a severe recession or other long lasting crisis event of some kind.

Linton

https://forums.moneysavingexpert.com/discussion/comment/82110242#Comment_82110242

The rational rationale for high yield investments is surely that you need steady-ish regular income now. The greater chance of long term capital gains in the future is not a substitute. High return is just one of a range of possible objectives, not the over-riding one.

If your need is not income now I dont see much point in using high yield funds.

Linton

https://forums.moneysavingexpert.com/discussion/comment/82110275#Comment_82110275

Diversified bond interest and infrastructure income are pretty secure in £ terms. Their interest cannot change quickly. . A global crisis of investment market confidence wont affect them, at least not in the short/medium term. Dividends, in £ terms, are driven by actual profits not market price movements. So again diversification is important.

A global economic event with companies in all sectors going bust and governments and currencies suddenly collapsing across the world would be a problem. But it is unreasonable to expect an investment portfolio to provide protection against such a doomsday scenario. You need to look elsewhere if that is you biggest concern.

Bostonerimus1

If you are going for natural yield it's important to look at the quality of the companies or bonds. The highest yields are often associated with risky investments. I'd stick to high dividend yielding large cap companies with a long track record.

mrklaw

https://forums.moneysavingexpert.com/discussion/comment/82110425#Comment_82110425

agree that if your need is not income now.

the reverse is not necessarily true though. If your need is income now, then the argument is a growth portfolio can also achieve that (potentially better) through growth and selling assets, vs the income coming off a high yield fund.

market volatility presumably applies to both in similar ways

NormalNorman

For myself the SIPP is 100% growth focused whereas the SS ISA is income oriented.

DB pensions are not until 60 so if I get the chop before then the ISA income and second job will cover most essential outgoings until I sort myself out. Income/monthly regular conts are reinvested for more income until needed which could be anytime.

Come retirement the SS ISA will then form part of retirement income as by then tax bands/thresholds will be more of an issue. I don't want every source of income to have a tax code. It also takes time to experiment/investigate which income funds you are comfortable with.

Linton

https://forums.moneysavingexpert.com/discussion/comment/82110481#Comment_82110481

The misunderstanding in the final sentance identifies the key point . SHort/medium term market price volatility does not directly affect generated income in £ terms. The amount of generated income year to year from bond interest and company dividends in diversified income funds is in general much more stable than their capital value.

Therefore you do not get Sequence of Returns problems whereby selling equity at times when prices are low cuts into the core reserves needed to ensure future growth.

Beyond perhaps annual monitoring, an income investor can simply ignore the capital value of the investments and not worry about the end of over-valuation of tech stocks etc.

Pat38493

https://forums.moneysavingexpert.com/discussion/comment/82110720#Comment_82110720

The issue for me is that there does not seem to be much data available that proves this point, at least for dividends. Dividends paid out by companies are not mandatory, so in theory, any company can suddenly decide to reduce or stop paying dividends (otherwise they would be called bonds wouldn’t they?).

Maybe this never happened before and all these companies just carried on paying dividends through every crisis in history, but there doesn’t seem to be much detailed data to actually prove this - e.g. commercial property profits might go down if all these companies businesses using them go bust and defaults on their rent in a slump and therefore they might have to pay less dividends?

michaels

https://forums.moneysavingexpert.com/discussion/comment/82110494#Comment_82110494

This is something that actually makes sense. Drawing 'regular income' from an ISA means it can be used for 'gifting from income' whereas having a different structure where you sell assets it is counted as a capital gift and thus is instead a PET.

daveshep26

https://forums.moneysavingexpert.com/discussion/comment/82110960#Comment_82110960

You are absolutely correct that a company can make any (legal) changes it wants to dividend payments. However, my way of thinking about this is that some companies may / are likely to reduce payments – but it is extremely unlikely all companies in a diversified income (equity) portfolio would do so all significantly at the same point. Income oriented Investment Trusts (ITs) seek to deliver sustainable, including with growth, dividends over appropriate timescales – AIC research (2021) is indicative of what happens (2020 pandemic outcomes in this case) – this showed 85% of income -paying ITs increased or maintained their dividends over 2020 whereas only 23% of open-ended funds were able to do the same (with total UK dividend income falling 41% overall); concluding there can be a wide range of dividend responses (reductions) BUT THIS IS AS EXPECTED in line with strategic intent of said vehicle – that’s why many pay attention to AIC dividend heroes listing (& the like) and use as core of income generating strategy.

This is only my own view, but I would suggest that investors with such plans are principally trying to “control what you can control” rather than striving to optimize in face of unknown/ uncertain externalities. As others have highlighted the “problem” is current income requirements. Many have growth portfolio elements alongside the income generating investments.

BW- DS