Equity income can be a powerful investment strategy for retirees

19th July 2012 by The Harried House Hunter

By Nick Kirrage.

Much has been written about how the economic downturn of the last five years will have forced many people to rethink their retirement plans. However, this will, to a certain extent, depend on how and where they have been invested.

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 mightaverage 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. On the other hand, if you have chosen to invest in assets that do not provide a strong and growing income, then at some point you are going to have to make the decision to sell your investment to supplement your income. Eliciting the best price then comes down to timing the relevant market and there is still precious little evidence investors are any good at that.

With equity income, however, as long you are investing gradually and consistently over time, you can live off the income paid out to you without worrying about timing the market, which makes it a powerful investment strategy.

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