It is also just as important to focus on the security of the income stream for equity investments. Simply investing in the highest-yielding companies is rarely the best strategy from a sustainable income perspective. It is better to focus on firms paying out less in the form of dividends, but with greater security and the ability to increase that dividend over time.
An equally important consideration is the inflation protection of the income stream. The biggest part of income protection will come from equities, provided companies that are able to increase prices, and thus dividends, in line with inflation are invested in.
However, diversification requires investors to look beyond equities and the fixed nominal coupons from bonds that don’t keep up with inflation. These are typically assets that benefit from strong demand and limited supply, such as buildings in locations that will support sustained rent rises or infrastructure that the government needs private investors to fund and therefore has to offer attractive terms.
Income investors should be aware that higher yield equals higher risk in an efficient market, in most cases both to capital and income. The key to squaring this circle for investors is to identify pockets of market inefficiency where the yield on offer is attractive relative to the risks involved. All that glitters is not gold.
Andrew Summers is head of collectives at Investec Wealth & Investment
