Equity income can be a powerful investment strategy for retirees

19th July 2012

Take equity income strategies. In 2009, as market falls forced companies to revisit their dividend policies, UK equity income funds had to follow suit and cut their dividends aggressively. Obviously that made life very difficult for investors and yet the rebuilding of dividends that has since taken place means the payouts on some UK equity income funds are today not far from their 2008 peaks.

Clearly, in terms of equity returns, the UK market has done very little over the last decade. Some UK equity funds will have done better than others here but, interestingly, even if you were invested in a fund that did not outperform the market, you should not have suffered from an income perspective. In other words, while the market has done badly, if you have been invested in high-yield companies over the last 10 years, you have actually seen your income grow very strongly from the market as a whole.

Most people now on the verge of retirement will probably be looking to have a proportion of their pension pot in an area that offers some upside while hopefully preventing the need for them to eat into their original capital – or, to put it another way, in something where it does not matter what the price of equities is as long as they are receiving a decent dividend.

A crucial point about run of the mill equity income strategies is that they could offer an income that grows over time – not in a straight line, admittedly, but they might average maybe 5% or more a year over the longer term. Thus, while on the first day of your investment you may see a yield of 4%, by the tenth year that yield could be more than 7% and it should continue to grow, although this is not guaranteed.

At that point, if you can live off that income, you need not care what the underlying equity is doing – just so long as you do not have to draw down on it.

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25 thoughts on “Equity income can be a powerful investment strategy for retirees”

  1. forbin says:

    Hello Shaun,

    Well I’m not expecting any logical scientific approach in the budget….

    I was going to post Flanders an Swann – “Theres a hole in Budget” from 1974

    But I think a quick paraphrase from HHTG – Golgafrincham “B” Ark…….

    So we’re actually going to land economy safely ?

    Well not, not, not so much land in fact, I think as far as I can remember we’re programmed to, er crash it.

    ARTHUR and FORD:

    Yes. It’s all part of the plan. … I think. There was terribly good reason for it which I can’t… quite… remember at the moment.

    [Yells in exasperation] You’re a load of useless, bloody loonies!!

    Ah, yes, that was it, that was reason it was. Ha. Pass me the RPI index link pension will you?

    ( hint: not Marvin )

    As for BBC Infotainment – well I expect these days we don’t need presenters that have economic training/education to “present” economics – I mean if we can get History teachers to teach English and PE teachers to teach Maths and Physics – what are we expecting ?


    1. Anonymous says:

      Hi Forbin
      In a way I am disappointed it was not Marvin (the paranoid android) as I think that he was a creation of near genius….

  2. pavlaki says:

    Spot on! These politicians and central bankers need to get out of their offices and talk to people more. High inflation (mainly due to a weak pound), dropping real salaries and negligible interest on savings all add up to a perfect storm for consumers who have stopped spending other than on necessities. I have had this same feedback from dozens and dozens of people who are in the socio economic group that in normal times (what were they?), would be spending. The worrying thing is it sounds as if we will get more of the same!

  3. JW says:

    Hi Shaun
    On the EZ basis of calculation, if UK growth replicates the last 3 years , we will look more like Italy than France.
    Loads of dialogue about minute differences today.

    Are you suggesting its time for increasing interest rates and some blood-letting?

    1. Anonymous says:

      Hi JW
      The national debt debate has popped in in some places with the supposedly informed saying that we will be in danger of the Reinhart-Rogoff whereas we will most likely fly through it….The ONS can fool at least some and maybe many of the people.
      As to interest-rates yes I believe that as part of getting back to where we were we need to start by getting them up to the range 1.5% to 2%. Here is an irony as I suggested rises back in 2010/11 as an anti-inflationary move (correctly in the light of what happened to inflation) but right now I might wait a few months! Because I believe that timing is very important I would pick my moment even though if I had been setting them yes they would already be higher now.

  4. DaveS says:

    I’m afraid its all irrelevant – we are bankrupt. Its already happened. The public just doesn’t understand it yet.

    It doesn’t matter what any government does. Real austerity will push us in downward spiral to hard default. Stimulus will push us in an upwards inflationary spiral to soft default. Either way we default. The debts, both private and public are simply too big and we can’t grow the economy without taking on more and more debt.

    There aren’t any economic levers that can be pushed or pulled – it can’t be solved by economists.

    As predicted, they have resorted to the failed growth formula – ponzi up the housing market and try to get home-owning consumers borrowing again. More houses, more debt, more consumption.The 2008 crash is a distant memory for these idiots.

    I think its a safe bet we will have an inflationary spiral – how long before it implodes, I don’t know – maybe longer than we think if the rest of the developed world inflates with us. I think for the UK the end game is when we detach from the US dollar i.e. the cross-over from high inflation to hyper-inflation.

    And when we implode I very much doubt the IMF will be able or willing to bail us out – it will be a super-sized popcorn experience,

    1. Anonymous says:

      Hi DaveS
      I agree entirely that the grand designs favoured by many economists wont help much and may even harm us. However it does not mean that we cannot make things better and if we keep going a bit here and a bit there we can emerge in a much better state.
      Also there is always the possibility that as the film 2001 put it “something wonderful” might happen such as cold fusion or some other breakthrough.

      1. Patrick says:

        Loving that optimism Shaun!

        Slightly off topic, and probably a stupid question, but why do we have to look outside the UK to fund infrastructure projects? (Qatari funded Super Sewer) We seem to be quite good at printing money? Is there not an opportunity to launch some national bonds for UK folks to invest in to pay for Super Sewer, Genuine HS rail extensions, additional airports, nationalised cold fusion research…

      2. DaveS says:

        We could make better decisions, but those entrusted to do so, the politicians and central bankers won’t.

        Partly they will act to protect their vested interests, partly they will act to defend the system because they actually believe in it. Rather than seeing globalisation as a failure, they see it as a stunning success which has been knocked off course. Its not surprising, they made their careers supporting the system, they wouldn’t be in their position today if they didn’t believe in it.

        You mentioned cold fusion before, that really is pushing the optimism envelope ! Personally I will stick to buying lottery tickets, its an 80M Euromillions on Friday !

  5. Rods says:

    Hi Shaun,

    Another great dialogue of where we are.

    Another entry for your financial lexicon is that 2.8% and 2.7% growth is the new way to describe stagflation!

    I think the underlying economy is actually doing a bit better than the headline figures, where last year North Sea Oil production dropped by 1% and the economy managed to flat line. Taxes are also still going up which again is leaving people with less to spend and we know from the OECD that each 0.5% tax rise causes 0.9 to 1.7% drop in GDP. But the other side of the coin is that the number of people living and here is going up, with a net 200,000 added every year, many of whom are of working age and they will all be additional consumers.

    But with this Government making very little real effort or any success in re-balancing the economy, I think it is a damning situation where this was a corner stone of the manifesto on removing the deficit in the life of this parliament and keeping our AAA rating. The departmental spending cuts are just used to pay the ever increasing sovereign debt interest. In the present climate I agree that consumers have pulled their belts in, I know I have through necessity, but also entrepreneurial activity at the moment is as dynamic as a dead cat bounce.

    What is the point of working long hours and taking big risks with tax paid money to fund new projects with the current tax rates we have and if you are one of the 20% whose business is still running after 5 years, then when you go to sell it you get hit with another 28% CGT!

    Until the amount the Government spends drops from the current 49% and the tax burden starts dropping, then all I can see is stagflation, until the markets decide in 2014 or 2015 it is unlikely that the deficit will come down so we have a balanced budget, before we reach the point where the sovereign debts can’t be paid back. At that point, that’s when the real inflation will start and the Government will be working hard to break the 1970’s record of 28%. You will then be reminiscing and asking us readers if we remember the good old days when inflation was only 3% with a small drop in real wages!

    1. Anonymous says:

      Hi Rods

      You may enjoy these other excerpts from the Bank of England February 2011 Inflation Report. Here is Mervyn King on rebalancing.

      “And the rebalancing of the economy – necessary to ensure that the recovery is sustainable – is underway. Spending has begun to shift away from consumption – both private and public – towards exports”

      “That rebalancing is expected to continue over the forecast period.”
      Oh dear….

  6. Drf says:

    Hi Shaun,

    “On my two main points we do have a change in the Bank of England remit
    and yes once 2013 had gone (no real way of sugaring it now…” It seems to me that there is no effective change in the remit at all! It is all smoke and mirrors with a supposed 2% target still in place as a decoy. For something like the last 10 years the BoE has not in reality targeted inflation which is why the housing bubble was allowed to get out of control. More recently as we all know they have done anything but target inflation! So nothing seems to have changed at all, except that the governor now does not have to write the fatuous letter to the Chancellor confirming his “failure” yet again until the same time as the minutes of the last MPC meeting are published. So what has changed? They are (and once Carney commences, even more so) intentionally allowing inflation to rip to write off a large portion of government debt. So what is actually any different?

    1. Anonymous says:

      Hi Drf
      I entirely agree with you. The theory has changed and the remit has been modified but policy will continue to be one that is set to keep inflation above its official target.
      Really the remit change is backwards looking is it not?

  7. Anonymous says:

    Oh great, We are going back to the good old days when i received a 21% pay rise.(1980)
    .As i have posted before i live off my savings and i am seriously thinking of doing a little work again just to offset the theft via inflation.

    But i will not go above the 10k tax limit.

    As for the help for the first time buyers from the government..
    God help them because they will be naive first time buyers who will have instant negative equity in a overpriced new build the minute they open that front door.

    2.8% growth coming to us very soon.
    I have a dream by Abba comes to mind..

    I see the Cyprian parliament did not have the balls to try and ripoff ex-KGB officers and the mafia..A pity..Great bedfellows..

    1. Anonymous says:

      Hi Geoff

      It appears that the banking/housing ponzi scheme is worshipped as an act of faith by our leaders and establishment and they are terrified of trying to deflate the bubble or even letting it deflate.

      As to Cyprus I fear for what will happen next. One thing I am sure of is that this quarters numbers for economic growth are likely to be dreadful.

      1. Drf says:

        Hi Shaun,

        Surely this is because they know that most of the banks are still over exposed to the housing market (via deriatives) and if there were the natural correction necessary a significant number of mortgagees would be in negative equity and defaulting; this would result in more banks having liquidity difficulties all over again, and so the government wants to pump up the housing market to protect the banks positions?

    2. ernie says:

      Geoff – it seems to me that the housing market to our “leaders” is equal to a cow for a Hindu (no insult intended to Hindus) – it’s sacred. In what other field does a higher price equal something to be desired? Electronic goods?Energy?Cars?Food? – no, thought not…

    3. Anonymous says:

      I thought the Cypriot parliament made a brave decision in telling the ECB & Merkel “NO”. The “savings tax” will destroy Cypriot banks as dead as the Icelandic banks, as almost nobody would ever trust them with money again. While there may be lots of dirty money, there’s also many Russian business people hiding their money from the mafia.

      The Cypriot politicians should ask – do we want to copy Greece or copy Iceland ?

      I’d also suggest that living people cannot dis-associate themselves with the KGB – there is no such thing as an ex-KGB officer, source etc

      1. DaveS says:

        The Cypriot banks are dead whatever happens.

        The EU morons just crossed the rubicon – depositors have had a wake up call – private assets are not safe in a bankrupting nation.

        They aren’t safe in Cyprus or much of the EU – there will be a slow motion bank run across the EU – I assume its happening now, It will happen in the UK when this safe haven farce gets exposed.

        I’d hate to be a billionaire these days – just where would you put your money ?

        1. Drf says:

          In real assets!

        2. Anonymous says:

          Yes, I expect bank runs in Spain, Italy etc. A banks most precious asset is public trust, without trust the bank is finished.

  8. Anonymous says:

    Hello Shaun.

    The bit about looser monetary policy and loser monetary policy is absolutely hilarious.

    As to how to deflate nominal wages, I would vote for using the RPIJ series. The CPI is useless for this purpose. It is not what it was meant to do, and the Jevons formula is, in almost all circumstances, a much better formula than the Carli, so the RPIJ is a better choice than the RPI.

    If you remain unconvinced, I suggest you read the paper by the man who trained me, Bohdan Szulc:”Choice of Price Index Formulae at the Micro-Aggregation Level: The Canadian Empirical Evidence”. The evidence that the Carli formula overestimates price change with frequent linking (in the RPI there are annual links) is overwhelming.

    1. Anonymous says:

      Hi Andrew
      The Economist Free Exchange blog scored something of an own goal there I think….
      As to inflation measurement I agree that the RPIJ should prove better than the CPI. The debate over Jevons continues in the UK with it coming under fire too. I hope as we go forwards that the CPI and the Jeevons formula will get the same official scrutiny as the RPI and Carli have done so that the debate is not focused on only one issue next time. Also I would point out that in the UK many feel that inspite of having faults the RPI understates rather than overstates inflation.
      Thank you for the paper suggestion and I will have it in mind when I go to the Royal Statistical Society on Monday afternoon as this subject is on the list for discussion.

  9. Anonymous says:

    Well said re the “multiplier madness”. A lot of people seem to think that the economy could be saved by a few more of their pet projects. Just hand them the purse strings and it seems we could double the size of the economy effortlessly! My kneejerk mental response is “well so might a good old-fashioned groudnut scheme…”

    The shame of it is that ideas like “multiplier” or “social value added” are not fantasy concepts, and in principle should be useful policy tools. But when you hear those words, especially in close succession, it’s most often a sign that someone is on the hunt for shiny things to feed their hobby horse with.

  10. David Lilley says:

    Below is my response to Simon Ward’s comment on the budget and not yours.
    Simon gets no comments whilst you get excellent comments. Your’s and Simon’s blogs are a must read. Steph and Robert Peston are poor by comparison.
    I’m afraid I disagree. It was an excellent budget.

    It was tinkering, yes, but we have no money.

    All the tinkering was in the right direction and that is all that counts.

    There was no support for the housing market. A 20% discount on new homes for first time buyers is bad news for the housing market. It robs the housing market of first time buyers and sends them to the new homes market that provides new homes, construction industry employment and growth without additional borrowing. The money is big-time but it is in the form of guarantees and at the base rate of 0.5% and not at the going mortgage rate that includes a fourfold spread. Additional homes will increase the supply of homes and depress the housing market. Simple supply and demand, the only known principle in economics proper.

    Employers do what it says on the tin, they employ. Employer’s NIC is tax on employment, a jobs tax. Eliminating employers NIC for SMEs will boost employment. Even the enemy in the camp, the head of the OBR, concludes that 600,000 jobs will be created in the next 12 months.

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