Income metrics - fund and dividend yields
Whether you are investing via funds or individual company shares, it should be simple to find an indication of the income that an investment has paid.
Funds which pay an income a should display a ‘yield’ figure. This is a percentage which indicates the level of income that you would receive by investing now if the previous 12-month’s income is repeated in the next 12 months.
Similarly, for individual shares the ‘dividend yield’ indicates the income paid by a company in the past year. You’ll find these figures when you search for investments via your investment account provider. Fidelity Personal Investing’s Investment Finder allows you to filter search results to include only those paying an income, with yield figure prominently displayed.
These figures are not a guarantee of the level of income you will get because income from dividends or bond interest may not be repeated.
Income from growth
As laid out above, income from investments does not have to come solely from dividends, bond interest or other regularly produced payments. It can also come from the growth in assets which are sold to provide the cash you need. If the level of income produced by dividends and other regular payments - sometimes called ‘natural income’ - is too low it may be necessary to sell growth assets.
For those using investments to fund retirement, selling assets may actually be part of the plan because they want to run down their retirement pot in the years before they die. That’s what it’s there for, after all.
There are risks, however, in relying on growth for income. Growth assets, including many company shares, tend to be more volatile so the value of your savings is likely to rise and fall more than if they are invested in safer assets, such as bonds.
If you are having to regularly sell assets for income, there is a danger that you sell after they have fallen in price and lock in those investment losses without giving your portfolio the chance to recover. That’s why some investment advisers recommend being ready to time the sales of your growth assets with period when those assets have gained in value to avoid this. If assets have fallen in value, being able to reduce the income you take to only the level produced by natural income will help maintain your savings.
It can make sense, then, to hold a portfolio with income-producing assets to provide a steady stream of cash balanced with some growth assets that can grow and be sold when the time is right.
Getting the right mix of assets
Balancing the assets you need to provide a steady income is not straightforward. Choosing individual shares for the job requires that you understand the companies you invest in, but also the prospects for the income they pay to continue and grow. Investing via funds helps manage this risk by diversifying your money and putting stock selection decisions in the hands of an expert, while passively managed funds give your broad exposure to markets for minimal cost.
There are still decisions to make, however, about the correct mix of different asset classes you should use.
That’s why many see the value of individual funds which have the express purpose of generating an income from different assets, while aiming to keep the value of your savings steady - a valuable quality if you need your income to be reliable.
Multi-Asset funds aim to provide this by balancing a range of assets - including bonds, property, infrastructure, commodities, shares for income and shares for growth - in one portfolio which then targets a steady level of income.
Fidelity’s Navigator range of funds does this. You can specify that you wish to take an income, and then select a level of risk that you are comfortable taking. Navigator will then guide you to a fund that could suit your purposes.
A cash reserve
When seeking income, the money you hold outside investments can be just as important as the money held inside them. Cash savings are a vital protection when you invest for income because they provide a buffer to the ups and downs of the markets.
Professional advisers will recommend holding as much as a year’s worth of income (or even more) in cash, and then to pay your income from this. The rest of your money can then be invested, with the income from investments used to replenish your cash reserve each year.
The benefit of this plan is that a sudden change in the value of your investments doesn’t have to translate immediately into a lower income. You may have to reduce your income in time - or perhaps limit it to only the income produced naturally by dividends - but your cash reserve gives you an opportunity to plan for this. It also gives assets which have fallen in value the chance to recover losses.
Important Information: Tax treatment depends on individual circumstances and all tax rules may change in the future. Withdrawals from a pension product will not normally be possible until you reach age 55. Please note that Navigator is not a personal recommendation in respect of a particular investment. You should regularly reassess the suitability of your investments to ensure they continue to meet your attitude to risk and investment goals. Fidelity Personal Investing does not give personal recommendations. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.