Income and growth - can you have both?
Leading experts, including Schroders' Head of Income Solutions Rupert Rucker, speak to The Times about whether investors can generate both income and growth from their investments.
Illustration: Andrea Ucini
This article was written by The Times in December 2018. All views and opinions are those of the publication unless otherwise stated.
Can you have your cake and eat it? Many investments, including equities, appreciate in value while also generating some income. You can reinvest your income to boost your long-term returns or you can withdraw it – leaving less left in the pot.
It’s a balancing act. For one thing, this doesn’t have to be a polar choice – for example, you might choose to partially withdraw your income. Also, the extent to which taking income will reduce your long-term returns depends on how big a chunk of these returns are accounted for by income.
The evidence here is frustratingly patchy – and the answer varies over time. Data from Standard & Poor’s suggests that since the Second World War, the portion of total return attributable to dividends has ranged from a high of 53 per cent to a low of 14 per cent.
Investors therefore have to make some educated guesses. It’s not possible to say for sure how much impact you will have on long-term growth when taking a particular level of income from your portfolio. It could be negligible or turn out to be very significant, depending on the returns your investments may earn in the future.
Advisers and investment experts disagree on where the balance lies. Some are convinced it is possible to manage a portfolio successfully for income while also preserving – or even growing – capital. Others argue that this is very difficult to achieve in reality.
Yes, it can be done
Ian Sayers, Chief executive, Association of Investment Companies, said: "Traditionally, people saw retirement planning in two phases: before retirement, where the focus was on capital growth, and after retirement, where the focus was on generating an income, usually through an annuity.
"When George Osborne abolished compulsory annuities, everything changed. With people potentially looking forward to decades of retirement, many want an income and to continue to tap into the growth potential of the stock market, for example to provide an inheritance.
"Investment companies prove that can be done: they have unique advantages when it comes to managing income over investment cycles – such as the ability to retain income in good years to pay out in leaner ones – and far greater investment flexibility. They have sectors that focus mainly on capital growth and others that focus on an immediate high income – but in between are those that aim to deliver a mix of both and have done so successfully for decades.
"With these shifts in how people plan for retirement, it is not surprising that the UK equity income sector regularly features as one of the most popular choices with retail investors and advisers. I can only see interest in such options increasing as people adjust to a new normal for retirement planning."
Not without a compromise
Patrick Connolly, Chartered financial planner, Chase de Vere Independent Financial Advisers, said: "Some investment funds are designed for capital growth, some to produce income and some for a combination of both. Where a fund is aiming for growth and income, compromises need to be made.
"This is the same for individual investors, who often have to compromise between maximising capital growth and having some capital protection. If their focus is solely on capital growth, they will likely hold everything in equities, whereas many investors diversify their portfolios by holding other asset classes.
"Investors focused on income need to recognise that dividend payments make up a significant proportion of stock market returns and any withdrawals will impact on their capital growth potential.
"The right investment approach will depend on their personal circumstances, financial objectives and attitude to risk. They need to decide where they sit on the line between maximising growth and income, and determine their investment strategy accordingly. It is possible to benefit from dividends and capital growth but there really are no guarantees."
Focus on the long term
Rupert Rucker, head of income solutions at Schroders, said: "Income-seeking investors are having to think more carefully about how to manage their savings.
"The landscape has changed for investors looking for income. There was a time when you could put your money in the bank or in National Savings and earn a decent income without having to think about it too much. Those days have gone and look unlikely to return in the foreseeable future: in this low interest rate environment, we all have to think much more carefully about how to generate income.
"In practice, you’re almost certainly going to have to be prepared to take some risk with your capital. The stock market has actually generated very consistent levels of income yield in recent decades; however, that yield, currently around 4.5 per cent for the FTSE 100, is a percentage of the capital value of your investment, which can fall as well as rise over time.
"Inevitably, if you draw down your income, rather than reinvesting it, you can’t expect the same level of capital gains as someone who puts all their income back. But that doesn’t mean that you can’t look forward to any capital returns at all, particularly if you’re focused on the long term and invest at reasonable valuations.
"The key is to understand your investment objectives and then to consider how to achieve them. In the current environment, we all have to take more responsibility for how we achieve our financial goals. Advisers can help us to make decisions and a fund manager can implement our choices, but we will all need to think more carefully about managing the balance between income and capital growth."
- Read more about how Schroders can help your clients in the search for income
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The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Please also remember, in the UK, up to £85,000 of your money is secure in a bank or building society through the Financial Services Compensation Scheme, unlike stocks and shares or fixed interest investments which are less secure.
Important Information: This article was written by The Times, all views and opinions are those of the publication unless otherwise stated. The views and opinions are those of the authors, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. Views are subject to change.
The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Past Performance is not a guide to future performance and may not be repeated. Any references to securities, sectors, regions and/or countries are for illustrative purposes only and not a recommendation to buy and/or sell shares.
The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.