7 Nov, 2014 @ 09:00
1 min read

Chasing dividend yield for income

WITH political turmoil in Ukraine, Syria and Iraq and the fear of a growing Ebola epidemic and oil prices slumping, it’s no surprise that equity markets have been in a spin.

Market volatility has been extreme, a drop] to summer 2013 values – potentially very bad news for investors, however, that is not always the case…

Volatile markets create buying and selling opportunities. Now is a time when active investment management should prevail over passive funds, which are run by computers and designed to simply track an index. They will do this without fail – tracking the indices down as effectively as they track them up.

On the other hand, the savvy active manager will be managing their portfolio very carefully and – depending on his timing – may be able to make use of the turbulence in prices along the way. It is much more difficult to make profit when prices are static.

All well in theory, but who has the time to actively manage their money?
Furthermore, if you engage a fund manager, are they simply managing a huge fund with an overall growth objective in mind or are they offering a bespoke management service to you which is based on your own time frame and objectives?

I work with a number of fund managers, all with differing styles. Some will only work on risk-graded portfolios while others offer a tailor-made service – which is much better for large investors.

One principle does apply to all investors,large and small, looking for income from their capital and that is applying dividend income to meet income requirements. This makes the day-to-day volatility of capital value much less of a concern.

With interest rates at an all time low, money on deposit will only return 1-2% at (perhaps a little more if you lock in for 5 years) but, if you rely on the capital for income you will probably be eroding that capital to maintain your income stream.

An investment strategy that has a focus on dividends could make a big difference as an alternative solution. With yields of 3.5-4% – even if the capital value fluctuates – the income stream is more reliable.
Looking long term, capital values should recover and depending on your choice of investment you may even see a little growth in real terms after allowing for inflation as opposed to the certainty of your capital in the bank declining.

One cautionary note, however, there are still too many structured products and investment schemes that purport to offer high returns and guarantee capital values but may deliver little. Check the small print and remember the old adage: “If it looks too good to be true…”

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