Investing for a higher income

Investing for income, rather than capital appreciation, is as old as investing itself but its relevance becomes more noticeable in times of low bank interest rates. (Or historically low as the media likes to keep reminding us).  

It offers an additional lifeline for those who need to live from the interest from their savings and not just accumulate for a point in the future.  The relevance is bigger for those who are not working and do not have a regular income due to ill health, out of work or in retirement.

To elaborate this theme, I have written in the past how an investment should be considered to behave like a garden.  It should be well cared for, maintained, trimmed, fed and watered otherwise it becomes out of control and the weeds take over.  In no time the tendered beauty and joy of a well cared for garden, diminishes. 

Well, I would like to expand on that concept further to explain the purpose of investing for income.

For most of our working lives we try to accumulate capital, save from the very money that we earn to amass the assets that we will one day live off in retirement.  But during this time, you may be unaware that you are actually investing for income as well. Its just that the income is being reinvested back into your account to make the capital appreciation quicker.  The difference is that when you reach the point when you want the income, you invest in those assets which pay the better levels of interest and have it paid out instead of reinvested. 

If we think about it another way, it is the equivalent of the garden.  A beautiful cottage style garden that you cultivate from seed and over many years that you carefully tend to.  The flowers bloom each spring, and you diligently tend to the plants as they grow, check for problems, apply pest control methods, trim the flowers to put on your kitchen table and enjoy the joy that it brings for you and the family over the years.  During this time you may have a small vegetable plot. (the equivalent of an income).   But during your working years you have to invest in earning a living and this may prevent you from expanding the vegetable plot, after all you earn enough money to buy vegetables from the supermarket instead of growing them.  The garden provides joy and pleasure but only a small amount of income.

When you finish working and your income level may drop, you now have more time to spend on the part of the garden that can provide you with more of the supplemental income.

But, there are 2 types of vegetable plot, those that provide and those that don't.  The difference relies heavily on the soil.  The  fertility of soil  in which you plant those veggies.  If your soil becomes too abused it will stop producing. (Note, Westernised economies and the reason for low interest rates).  So you have to look at either changing the type of vegetables you plant (crop rotation) or changing the soil. Both can be as effective as one another. 

This is the basic concept of investing for income.  If one area is not providing sufficient rewards, then it is time to look elsewhere. (Note, bank interest rates are so low that to maintaina  standard of living it is necessary to look at other forms of income producing assets)

Example

I would like to talk about Vodafone for a moment and in particular shares in Vodafone. We all know the name but you may not know the significance of Vodafone as an income producing share. 

The talk of shares in companies scares alot of people, but Vodafone is a good example of a reliable company that rewards it shareholders with good dividends (income) for being an investor.  At the time of writing, if you invested in Vodafone stock today, you would be rewarded with an interest rate of 5.13%.  And Vodafone also has a long history of paying income to its investors and more importantly a rising income. 

See the table below for the facts

Year ended	Interim	Final	Total	Growth %
31 March	Dividend	Dividend	Dividend
2010	2.6600	5.6500	8.3100	6.95
2009	2.5700	5.2000	7.7700	3.46
2008	2.4900	5.0200	7.5100	11.11
2007	2.3500	4.4100	6.7600	11.37
2006	2.2000	3.8700	6.0700	49.14
2005	1.9100	2.1600	4.0700	100.00
2004	0.9535	1.0780	2.0315	20.00
2003	0.7946	0.8983	1.6929	14.99
2002	0.7224	0.7497	1.4721	5.00
2001	0.6880	0.7140	1.4020	5.01
2000	0.6550	0.6800	1.3350	4.95

The thing to note is that from the 10 years till 2010 Vodafone increased its dividend 231.98%.  If this were the equivalent of bank interest, assuming bank interest started at 3% in 2000, then you would be receiving 6.959% interest on your bank interest in 2010.  (The dividends have also been increased through 2010 to 2013 as well !!, so the rate today would be even higher).  All this through 2 stock market crises (the tech boom and bust of 2000 and more recently the financial market collapse of 2008/2009). It should be noted that the underlying stock price has increased during this time as well.  

I am not recommending that you go online today and buy Vodafone stock.  With all investments of this type it comes with risks, management of the business, future profitability of the business and ability to continue to pay dividends, profit warnings, market sentiment, to name a few.   However, you can minimise your risk of investing in this way by investing through a fund that specifically invests, manages the risk and can pay out the income. 

The point of this blog post is to reiterate the point that if you feel that bank interest is not satisfactory for your living requirements, or you have a tax bill because of being resident in Italy and need supplementary income to pay it, or you just need some more income to make life easier then there are alternatives to leaving the money in the bank or investing in Government Bonds (the historical investment choice of type for the 'average' Italian).  

If you would like to know how to build a portfolio of income producing assets or would like to discuss any other ways of improving your current financial situation then you can contact me on gareth.horsfall@spectrum-ifa.com or call me on 3336492356.