Invest for income in order to beat inflation

How to invest for income in a low interest climate

What follows are fund managers’ views on how to invest for income in a high inflation – low interest climate, like we are in right now.

abridged version of “10 tips for investing for income from Neil Woodford and others” from Ian Cowie, The Telegraph, 11 october, 2010

Fund managers’ views on how to invest for income

  1. Avoid financial fashion - Neil Woodford, head of investment at Invesco Pepetual:
    "Look to invest in businesses that can provide sustainable long-term dividend growth. If I can invest in a business when its growth potential is not reflected in the valuation of its shares, this not only reduces the risk of losing money, it increases the upside." opportunity"
  2. Ignore volatility - Mr Woodford continues:
    "In the short-term, share prices are buffeted by all sorts of influences, but over longer-time periods fundamentals shine through. Dividend growth is the key determinant of long-term share price movements, the rest is sentiment."

    For a recent interview with Neil Woodford, click below:

  3. Don’t be greedy - Anthony Nutt of Jupiter Asset Management:
    "Beware high yielding shares – those yielding twice as much as the FTSE 100 – and those where the dividend has remained flat for several years; especially when the company has a high level of debt."
  4. Read the report and accounts - Mr Nutt continues:
    "Look for companies with a high and growing free cash flow – that is, money left over after all capital expenditure- as this is the stream out of which rising dividends are paid. The larger the free cash flow relative to the dividend payout the better."
  5. Reasons to be fearful - Mr Nutt continues:
    "Remember that the profits and dividends of utility companies are at the whim of the regulator. Beware of companies that pay a high dividend because they have gone ex-growth. Such a position is not sustainable indefinitely."
  6. Consider international diversification - Stuart Rhodes, manager of the M&G Global Dividend Fund
    "Within the UK, five companies account for 40 per cent of UK dividend payouts and only five companies,including Tesco have delivered 25 years of consecutive dividend increases. But in the US, nearly 100 companies can boast that longevity of dividend growth."
  7. Have patience - Carl Stick, manager of the Rathbones Income Fund:
    "Within the UK, five companies account for 40 per cent of UK dividend payouts and only five companies, have delivered 25 years of consecutive dividend increases. But in the US, nearly 100 companies can boast that longevity of dividend growth."
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  9. Seek reliability - Michael Clark, manager of Fidelity's Income Plus Fund
    "Some sectors of the equity market do not depend on strong economic growth to deliver attractive returns to investors. For example, pharmaceutical shares sell for less than 10 times earnings, with dividend yields close to 5 per cent. Pharmaceutical sales are much less dependent on economic growth, and enjoy an expanding market as the population ages in developed areas of the world, and as standards of living and medical care improve in emerging markets."
  10. Spread risk - Mr Cowie, The Telegraph:
    "Often said to be the first rule of investment, diversification to diminish risk is particularly important for income-seekers who cannot afford to lose capital."
  11. Don’t forget tax shelters - Mr Cowie, The Telegraph:
    Most people can boost returns by a quarter by investing through an individual savings account (ISA), which can deliver tax-free income, or a pension such as a SIPP, where contributions attract initial tax relief. There is no need to take any risks with either option; you can hold cash deposits in both."

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