How To Invest A Decent Sum For Income?

[DaveP]

A theoretical(ish) question...

Let's say you came into a sum of somewhere between a few hundred £k and a £million.

How would you invest for income, assuming that you are debt free and approaching retirement?

Caveat: I'm not after financial advice, merely an opinion on where you would look in this day and age.

[tjh290633]

The route I follow can be found in viewforum.php?f=15

Thee are alternatives using Investment Trusts, which might involve less work.

TJH

[ReformedCharacter]

A diverse portfolio of Investment Trusts.

RC

[GoSeigen]

A theoretical(ish) question...

Let's say you came into a sum of somewhere between a few hundred £k and a £million.

How would you invest for income, assuming that you are debt free and approaching retirement?

Caveat: I'm not after financial advice, merely an opinion on where you would look in this day and age.

Buy a heap of bank stocks and bonds; diversify via gold and platinum and mining and other UK shares, plus ETFs of Russian, Chinese, Indian and Japanese stocks, and a slice of emerging market commercial and residential property, then leverage up with spread bets on UK stocks, indexes and index options. Hedge about 15-20% of total value with short S&P bets.

Well, that's roughly what I am doing anyway, being in the position described in the OP. Income is derived from dividends, interest and gradually liquidating the spread bets into higher valuations or rotating stocks as relative value changes. It keeps me busy but is satisfying.

GS

[Urbandreamer]

Let's say you came into a sum of somewhere between a few hundred £k and a £million.

With the exception of it happening overnight, huge numbers of people are in exactly that position.
Many approaching retirement will have full pension schemes and ISA's with a total value in the range that you speak of.
Note that the average person with a pension scheme is not approaching retirement hence the average value of such schemes is a meaningless number.

I'm expecting to retire and live upon investment income in the next two years.

I have a couple of index trackers, property funds, significantly more in IT's, (currently) a small bond fund and a few shares that I like.

Personally I think that your portfolio mix has to be personal and relate to current or expected conditions. I'm happy with the volatility that I see on mine, others wouldn't be. I regard inflation as a significant worry over the next decade, others not so much.

Not everything that I own provides a dividend or coupon. However one IT that I own which does provide a dividend does so by selling some of its assets each year. An investor could do the same with low or no yield assets. Generating an income by liquidating some capital growth.

I will have to do this sort of thing once I retire as the yield produced by my mix of investments will be less than what I spend. Others with the same value in a HYP and the same expenses would not have to do so because they select for yield rather than total return.

[Wuffle]

Start with the tax and work backwards.
Tax is a marketing exercise to kid the poor into thinking that rich people get hammered.
Products exist nowadays to restructure the same investments to output whatever.
Then cover actual income, asset appreciation and volatility however you like.

W.

[jonesa1]

It all depends on how much ongoing effort you want to expend, how long the income has to last, how much income you want v need, personal attitude to seeing stock values fall, etc. Assuming you want a relatively hands off approach, then split between a couple of global trackers, generalist global ITs or generalist global funds and cash in the bank, proportions depending on what helps you sleep at night, withdraw from the cash fund, rebalance once a year.

[dealtn]

Let's say you came into a sum of somewhere between a few hundred £k and a £million.

How would you invest for income, assuming that you are debt free and approaching retirement?

I wouldn't. Since cash is fungible, and I can create and draw an "income", I would only be thinking of total return.

I would also be wary of answering the question since my attitude to having capital of "somewhere between a few hundred £k and a £million" would likely be different to yours, as would probably be our attitudes to risk. The usefulness of my answer is likely to be on the spectrum between worthless, and slightly useful, to you as a result.

If pushed, and income was the actual aim, and presumably on a medium to long term timescale, I would seek a portfolio of shares with a high return on capital and high cash conversion of profits. I wouldn't pay any fees to anyone else to manage such a collective, nor would I look at yield or other short term proxies for income.

[Itsallaguess]

Let's say you came into a sum of somewhere between a few hundred £k and a £million.

How would you invest for income, assuming that you are debt free and approaching retirement?

I wouldn't. Since cash is fungible, and I can create and draw an "income", I would only be thinking of total return.

I would also be wary of answering the question since my attitude to having capital of "somewhere between a few hundred £k and a £million" would likely be different to yours, as would probably be our attitudes to risk. The usefulness of my answer is likely to be on the spectrum between worthless, and slightly useful, to you as a result.

If pushed, and income was the actual aim, and presumably on a medium to long term timescale, I would seek a portfolio of shares with a high return on capital and high cash conversion of profits. I wouldn't pay any fees to anyone else to manage such a collective, nor would I look at yield or other short term proxies for income.

Self-management of investments is a laudable aim, of course, and over time can save considerable sums, so whilst that route might be palatable to both the OP and others who may be looking to invest over the long term, I think it's also beneficial to discuss the merits or otherwise of some of the varied income-investment options available, and perhaps especially so given the OP's wish to be looking to provide himself with a regular, ongoing income from his capital, perhaps with less effort than some other investors are wishing to put in to this particular aspect of their lives...

With that in mind then, I'd like to post a link to the chart below for the OP to take a look at, and point out that the pink 'Income Investment Trust (IT)' line might be of interest to him, and especially when compared to the other single-share HYP (High Yield Portfolio) and income-OEIC lines over the same time period -



Source thread - https://www.lemonfool.co.uk/viewtopic.php?f=31&t=26214&start=120#p358283

As a (largely) long-term income-investor myself, and as someone who also started out with a HYP portfolio of single-share income-holdings, but who has over recent years also moved firmly into the 'Income Investment Trust' sphere, the volatility of the above HYP data is something that I definitely recognise from my own long-term experience, and the much steadier and predictable behaviour of the above 'Income IT' data is also definitely a reflection of my own experience since that period too, and so in reply to the OP's original question, if he does still indeed plan on 'investing for income', then all I can say is that I dearly wish someone would have shown me the above chart twenty years ago....

If Arb is reading this (I've temp-quoted him above, in the hope that he might get a notification..), then I'm not sure if the above chart has had a more recent update, but from a personal point of view, and given the well-known turmoil within investment markets over recent months, I would certainly be interested to see an updated version of it, if that's at all possible?

Cheers,

Itsallaguess

[Arborbridge]

If Arb is reading this (I've temp-quoted him above, in the hope that he might get a notification..), then I'm not sure if the above chart has had a more recent update, but from a personal point of view, and given the well-known turmoil within investment markets over recent months, I would certainly be interested to see an updated version of it, if that's at all possible?
Itsallaguess

It sure is! This chart has been update to the end of Q1 but it looks a little different to the previous one for another reason: I've started the Y axis at "0" as suggested by Gengulphus.



There is also another chart showing how the income would have changed if £100 had been invested in each of my income vehicles from the start date - if that isn't confusing matters too much. I'll post if you wish.

Arb.

[Itsallaguess]

If Arb is reading this (I've temp-quoted him above, in the hope that he might get a notification..), then I'm not sure if the above chart has had a more recent update, but from a personal point of view, and given the well-known turmoil within investment markets over recent months, I would certainly be interested to see an updated version of it, if that's at all possible?
Itsallaguess

It sure is! This chart has been update to the end of Q1 but it looks a little different to the previous one for another reason: I've started the Y axis at "0" as suggested by Gengulphus.

Thanks Arb - and again, I hope that pink income-IT portfolio line is useful to the OP if he chooses to perhaps head down a more 'managed' income-portfolio route....

Cheers,

Itsallaguess

[SteadyAim]

As a starting point, I would consider putting it all into VMID, a Vanguard tracker that follows the UK FTSE 250 index. These are (roughly speaking) the next 250 companies in the UK market after the FTSE 100 companies, which are the largest in the UK market. The 250 index seems to outperform the 100 index in the long run, has more companies forming the index, and because it doesn't include the very biggest ones it has a much smaller change in size between the largest and smallest holdings. The companies do include a sizeable foreign component (although not as much as the 100), so it's not just a play on the UK economy.

I think this is "good enough" for most people, and extremely simple, making a good benchmark for anything else that is considered.

[LooseCannon101]

I would consider total return, not just income. One or more highly diversified global equity investment trusts should deliver about 2% dividend income. The average return including dividends over the past 20 years has been about 8%. Taking about 4% per year would mean selling 2% of one's capital. Global trusts provide protection against currency, company and country risk.

Most people on this site who own investment trusts would have at least half a dozen. I am unusual in that I have put all my eggs (about £500k) in one basket - probably the most highly diversified and also the oldest global investment trust - F&C (FCIT) which has increased it's dividend every year for the past 50 years.

[tjh290633]

I would consider total return, not just income. One or more highly diversified global equity investment trusts should deliver about 2% dividend income. The average return including dividends over the past 20 years has been about 8%. Taking about 4% per year would mean selling 2% of one's capital. Global trusts provide protection against currency, company and country risk.

Most people on this site who own investment trusts would have at least half a dozen. I am unusual in that I have put all my eggs (about £500k) in one basket - probably the most highly diversified and also the oldest global investment trust - F&C (FCIT) which has increased it's dividend every year for the past 50 years.

I have just been listening to the Alliance Trust AGM online. A comment made was that by reallocation of certain assets they could maintain increased dividends for the next 13 years, regardless. They have already done so for 54 years.

TJH

[1nvest]

Warren Buffett likes 90/10 S&P500/T-Bills (cash). In effect he's on the side that like to shift bond risk over to the equities side. 10 T-Bills/10 Stock as a barbell that approximates to a central 20 weighting into bonds. Others opt for 80/20 total stock market/total bonds. Personally I prefer a third each Smaller Cap (that tend to be more equal weighted like), Large Cap, Gold

US data example/comparison of total returns

Income streams such as interest/dividends are a prime target for taxation, reducing such is a de-risking. FT250, US S&P500, gold in equal measure yearly rebalanced and draw a income from total returns.

For income a lower SWR is safer than a higher SWR. At 2% SWR for instance you start by drawing 2% of the total portfolio value as income for the first year, and then in subsequent years you uplift that amount by inflation as the amount drawn as income in subsequent years ... so a nice yearly inflation adjusted regular income. £, US$ (primary reserve currency), gold (global currency as well as being a commodity) currency diversification. Small more equal weighted, large cap weighted, commodity asset diversification. And relatively neutral on the real interest rates front (stocks include debts - such as via issuing corporate bonds) and debt does OK in times of negative real yields - when interest rates are less than inflation, as does gold, and stocks are broadly approximately a third debt (half of book value).

With a low SWR such as 2% then even if there was a 2 decade period of 0% real (after inflation) total return from your investments, then spending 2%/year out of that for 20 years still has 60% remaining. Likely after such a bad run gains would tend to be good/great such that former valuations might be restored, and a valuation approximately of the equivalent to a 3.3% SWR. If you were drawing 4% SWR then you could be down at 20% remaining and a equivalent SWR of a 20% SWR - which would fail.

Combine that 2% regular income with pensions, and if you own your own home you have liability matched 'rent' (imputed rent benefit) sorted. And where more often/likely you'll be able to make additional irregular discretionary withdrawals/spending - likely quite significant amounts, typically 4% to 5% more whilst still not broadly seeing inflation adjusted portfolio value decline.

£1M capital in FT250/S&P500/Gold providing 2% (SWR) = 20K/year, 500K home that historically had 4% imputed rent benefit, 20K/year. Pension of 10K/year, and that's comparable to 50K/year total, potentially tax efficiently invested. Similar to another who was earning a 75K/year gross wage, 50K net and then paying 20K rent to leave 30K disposable.

And asset diversification that should hold up relatively OK across a wide range of circumstances. If the £ dived for instance, or interest rates/taxation soared (that they're hell bent on trying to induce by so much money printing) etc. If for instance the day after lumping in stocks dived, then possibly gold would do well and potentially offset the losses. etc. etc.

[Itsallaguess]

There's no single answer to the question and I have a portfolio of both growth and income collective investments plus a small-ish basket of single company shares.

I always think it's interesting that when it comes to picking cars, it's simply accepted that people will be quite happy to trade away 'pure miles-per-gallon' metrics in many situations, and often allow themselves to gain other 'non-performance' aspects in return, to deliver an overall driving experience that they, as individuals, are happy with as an overall package...

Long-term investment is similar, in my view...

Of course, if 'total-return performance' might be the 'MPG' of the investment world, then that's of course absolutely fine, but I think there should be less 'direct criticism' aimed towards those of us who might be quite willing, a bit like those 'comfort-over-performance' drivers, perhaps, to trade away some 'pure-performance metrics' in return for other non-performance aspects of our long-term investments that we might place some importance on over trying to squeeze the top-end MPG out of that often-hallowed 'total-return' metric...

Cheers,

Itsallaguess

[hiriskpaul]

My initial reaction to "How would you invest for income.." has long been "I don't, I invest for total return". However, it has suddenly dawned on me that this is not true. The majority of our income now comes from our investments, so I am investing for income! That income is taken from the cash we have on deposit, which is topped up from interest, dividends and the occasional disposal of investments. I don't specifically choose an investment according to the distributions made from that investment, which is something that may be being hinted at here. Perhaps "Investing for Consumption" is a better description of what we are now doing?

That windbaggy stuff said, if I had such a windfall right now I would give it to our children to invest as we really don't need the money. Failing that, I think I would probably put the money into iShares Edge MSCI World Value Factor ETF (IWVG) as I have been considering investing much more into value equities and reducing our high yield fixed income portfolio.

[Itsallaguess]

My initial reaction to "How would you invest for income.." has long been "I don't, I invest for total return".

However, it has suddenly dawned on me that this is not true. The majority of our income now comes from our investments, so I am investing for income!

That income is taken from the cash we have on deposit, which is topped up from interest, dividends and the occasional disposal of investments.

Isn't that fairly close to how we might expect an income-IT manager to work - to help provide that final running-yield from the overall income-IT portfolio?

I fully accept that you might be doing it yourself and missing out on paying some sort of management fee for an IT to do it for you, but in the round, is your approach that far away from a collective that regularly and reliably pumps out cash in the form of an overall IT dividend?

Cheers,

Itsallaguess

[dealtn]

There's no single answer to the question and I have a portfolio of both growth and income collective investments plus a small-ish basket of single company shares.

I always think it's interesting that when it comes to picking cars, it's simply accepted that people will be quite happy to trade away 'pure miles-per-gallon' metrics in many situations, and often allow themselves to gain other 'non-performance' aspects in return, to deliver an overall driving experience that they, as individuals, are happy with as an overall package...

Long-term investment is similar, in my view...

Of course, if 'total-return performance' might be the 'MPG' of the investment world, then that's of course absolutely fine, but I think there should be less 'direct criticism' aimed towards those of us who might be quite willing, a bit like those 'comfort-over-performance' drivers, perhaps, to trade away some 'pure-performance metrics' in return for other non-performance aspects of our long-term investments that we might place some importance on over trying to squeeze the top-end MPG out of that often-hallowed 'total-return' metric...

Cheers,

Itsallaguess

Yes but "total return", if you want to label it as such, allows you to "create" the income you choose, and when you want it too.

To me its not just seeking to get the "highest return", but also the flexibility of having a wider range of potential investments, and not relying on income only arriving on a set day (decided by others).

You are absolutely right though, there are trade offs, and people will choose which suits best, wider range, more flexibility, but perhaps more work too, or the opposite (or combinations of the two). There is no prescriptive answer, and the OP phrased the question what would we (individually) do. Presumably that information will help in his "hypothetical" puzzle. My bigger concern is that "he" is unlikely to resemble any of "us", so might have difficulty in translating our answers.

[Itsallaguess]

Of course, if 'total-return performance' might be the 'MPG' of the investment world, then that's of course absolutely fine, but I think there should be less 'direct criticism' aimed towards those of us who might be quite willing, a bit like those 'comfort-over-performance' drivers, perhaps, to trade away some 'pure-performance metrics' in return for other non-performance aspects of our long-term investments that we might place some importance on over trying to squeeze the top-end MPG out of that often-hallowed 'total-return' metric...quote]

Yes but "total return", if you want to label it as such, allows you to "create" the income you choose, and when you want it too.

To me its not just seeking to get the "highest return", but also the flexibility of having a wider range of potential investments, and not relying on income only arriving on a set day (decided by others).

It's surprising how often that 'dividend-day' aspect crops up over the years, but I've always considered it a complete red-herring...

Surely the majority of income-investors will pay regular dividends into a pooled account, then allow that pooled account to accumulate some level of 'float' with which they are personally comfortable with, and then when that float is large enough, they'll pay themselves regular or irregular payments from that float-account, with ongoing dividends back-filling that float at a level that can be monitored and maintained with very little effort, generally.....

Anyone who is waiting for 'Dividend Wednesday' so that they can then withdraw that dividend for their weekly income isn't considering the strategy in the most appropriate way, in my view, and using that potential situation as an argument against income-investment generally is, like I say, a bit of a red herring to be honest.....

Cheers,

Itsallaguess