DIY Investor Magazine
/
2015 Issue
33
As inflation in Britain falls to an all-time low, the long
anticipated rise in interest rates remains as elusive as
ever meaning those seeking income, from savings or
bonds, are still having a tough time. It’s an issue across
asset classes so could the solution be found in using
capital as income?
It has been a dry spell for those reliant on income. The
very loose monetary environment has stripped returns
from cash and fixed income products forcing some
investors to look to the higher risk stock markets to meet
their targets. While there has been some relief over the
past year or two, the financial crisis saw widespread
cuts in dividends announced by London quoted firms.
Many of us looked overseas.
But today there’s a further environmental problem in
equities for income seekers who simply cannot escape
these unusual economic conditions.
THE INCOME
CONUNDRUM
IT HAS BEEN A DRY SPELL FOR THOSE RELIANT
ON INCOME. THE VERY LOOSE MONETARY
ENVIRONMENT HAS STRIPPED RETURNS FROM
CASH AND FIXED INCOME PRODUCTS FORCING
SOME INVESTORS TO LOOK TO THE HIGHER RISK
STOCK MARKETS TO MEET THEIR TARGETS.
BY INVESTING IN A PORTFOLIO OF ZEROS IT
IS POSSIBLE TO PLAN A SERIES OF REGULAR
PAYMENTS OVER A GIVEN PERIOD. SURE THEY
ARE TECHNICALLY PAYING CAPITAL BUT DOES
THAT MATTER?”
The strength of the dollar combined with the collapse
in the price of oil price means that dividend growth is
likely to be much slower in 2015. The United States led
the trend in 2014 which actually proved to be a record
year for dividend growth. But according to Henderson
Global Investors, the headline rate will now fall from
more than 10% last year to just 1% this. That doesn’t
mean dividends are elusive but stronger stock markets
inevitably means lower yields.
That of course is an important distinction. For those
already holding an asset, rises or falls in the share or
fund price will mean a fall or rise in the percentage
income yield but the actual payout per unit will not
change unless the company or manager changes
policy. For those seeking a longer term income,
reliability is the key. Big, global, defensive sectors
such as pharmaceuticals or consumer durables tend
to display slower, less volatile, growth but also enjoy
steady revenues. For this type of investing, volatility can
be helpful as it offers opportunities to buy on general
market dips, thereby locking in yields but it does need
some attention.
There is another way to secure an income that requires
a bit of lateral thinking. Split Capital Investment
Companies offer different classes of share and in their
simplest form ‘split’ into income and capital growth.
Now that is all well and good and investors might be
able to locate some income.
But there is another class called Zero Dividend
Preference Shares (Zeros) which have a limited life and
pay back predetermined capital sums as the company
is wound up at pre-set dates. By investing in a portfolio
of Zeros it is possible to plan a series of regular
payments over a given period. Sure they are technically
paying capital but does that matter?
Well, it means there’s no income tax to pay. And
remember too that every year HMRC gives us £11,000
Capital Gains Tax Allowance which means we can
profit up to that level without liability.
A large number of investors make little use of this
allowance which means it is lost come April. But if it
is used to deliver a regular payment, it means that a
capital profit can be treated as an income and be tax
efficient.
Take care with these products though, they can be
complex and different classes of shares carry with
them different levels of risk. A scandal some years ago
exposed poor management so it pays to be choosy;
though it has meant a smaller investment universe.
Always take advice if you are unsure.
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