Income investors have been feeling the pinch for years. With interest rates at near-historic lows, many have been forced to take more risk with their money to obtain decent yields. This demand for yield has had the effect of driving up prices of assets that pay a reliable income.
Markets may remain testing, but advisers identify some key things investors can consider to maximise income potential while ensuring they are not risking too much with their capital. In our latest research round, the following tenets were shared:
1. Multi-asset approach for income
Advisers identify the importance of diversifying investments across asset classes. This allows investors to buy into higher-paying assets but ensures not all capital is tied up in riskier areas. Beyond bonds and equities, advisers are urging investors to consider assets such as property, cash or infrastructure. Multi-asset investment trusts with an income focus are also flagged as a good way to gain diversification.
2. Overseas investment trusts
The UK has historically been a good place to invest in equities with decent dividends. But, recently, there has been an increase in the number of global trusts and funds with an income focus. More overseas companies are now focused on using profits to make dividend payments to investors. By investing in a mix of UK and global trusts, investors can further diversify their holdings.
3. Thinking flexibly to protect investment capital
If investors take a regular fixed income from their portfolio, this can magnify capital losses when markets fall. Investors should be prepared to reduce the income taken to preserve capital. If not, they may have to take a larger slice of the remaining funds to meet income needs, further depleting their portfolio.
4. Phasing pay dates in investment
Advisers are urging investors to think about how regularly their investments pay an income. Is it annually, every six months or more frequently?
5. Reviewing investments
Advisers agree investments must be reviewed regularly. Have the investments paid the income clients expected? If they underperformed, advisers may want to consider rebalancing portfolios.
6. Reinvesting surplus income in investment
Investors should reinvest surplus income payments to boost overall returns. The power of compounding cannot be overstated by advisers and, over time, this should help grow capital, delivering a more sustainable long-term income stream.
7. Do not overlook capital growth
If investors want their retirement saving to provide a sustainable income for 30-plus years, it is important to ensure capital is growing. Focusing solely on investments that pay the highest yields potentially puts this capital at risk, which could jeopardise income received in the long term.
Phil Wickenden is managing director at Cicero Research