In last month’s newsletter, I commented on the structure of fixed interest securities. In this month’s edition, I am going to concentrate on the use of fixed interest and other investments to create income.
Most investors, particularly those in retirement, want to create income from their investments. Ideally, this income should be a level and reliable amount. Unfortunately, such an income cannot be achieved by investing in a bank account for the long term, because interest rates, even on a fixed-rate account, will change over time. Interest rates will go down, and so will your income, but not necessarily your expenditure.
If a client is faced with this dilemma, the solution is to acquire income from equities or fixed interest securities. You may be interested to know how this is possible. Surely these are more risky assets? This is true. The value of the holding will be affected by volatility in the market, but what is unlikely to change, and in the case of an equity may actually increase, is the income.
Investing in UK companies is ideal if you want to achieve a reliable dividend income. Most of the top companies in the FTSE 100 are likely to increase their dividends on a year-by-year basis, and it is perfectly possible to anticipate an income in the region of 4% per annum from these companies.
If you then hold a portfolio with a percentage in fixed interest, say 40% fixed interest and 60% equities, you should be able to combine the reliable guaranteed income from the highly rated fixed interest securities with the possibility of an increasing income stream from the equities.
For clients who are interested in achieving a regular income, we can build a well-diversified portfolio of income-producing funds, both in the UK and overseas. If this income happens to be produced from an ISA portfolio, then the income is not subject to tax under current legislation. Income can be structured to pay out monthly if required.
A similar portfolio construction would be suitable within a pension drawdown portfolio, where a stream of reliable income is advantageous. We also look for some capital growth from the equities in order to maintain the longevity of the scheme, as many of us experience increased longevity.