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5 reasons to become an income investor

Citywire's yield-hunting columnist provides some valuable starting information for would-be income investors.

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by Income Investor on Jan 28, 2013 at 13:57

Investing in the stock market is difficult - let no one tell you otherwise. The odds are that you did OK last year but if you are thinking of starting the New Year with a new approach why not consider becoming an Income Investor? This means that you will be seeking cash returns on your investments (whilst safeguarding your capital value) rather than trying to spot the next ‘10-bagger’ giving capital growth.

In the Income Investing approach described here I am assuming a mix (in equal proportions) of income in the form of share dividends and ‘coupons’ or other payments on corporate bonds and other fixed-income securities.

I have (obviously) found this approach to work well for me - but could it be for you? Here are my top five reasons to convince you:

1. It provides income (reasonably) stable and predictable income

Bear with me. Sooner or later you are going to want to retire from the rat-race and enjoy life a bit more. You’ll need income to cover your living expenses. An income-oriented portfolio should provide a reasonably stable supplement to any other sources of income you might have (such as a pension).

What is more, income from an ISA is not counted towards many benefits, such as Child Tax Credits - in case you are unexpectedly made redundant.

Of course, if you need cash another option is to sell some of your portfolio holdings. However, the prices of these securities (particularly shares) can fluctuate wildly (think 2007/8). In contrast, the income from an income-oriented portfolio is usually much more stable, making financial planning more straightforward.

2. It’s a (fairly) simple ‘Buy and Hold’ approach

Generally, there is not a lot of admin involved - this is usually a ‘fire and forget’ investment style, although it is not completely ‘hands off’. To offer a painful example: whilst my portfolio nearly halved in value (!) during the 2007/8 crash, by continuing to hold (and not being shaken out of the market), I was able to recover most of the value of my portfolio since then. By contrast, the income was relatively stable and has continued to grow (albeit slowly).

There are, of course, times to sell – usually to take a nice profit.

What is more, the income from the portfolio – typically 5-6% – provides the opportunity to reinvest and rebalance (in my approach between dividend shares and fixed-income), without having to sell anything!

3) Comparing yields is (relatively) easy

Finding winning ‘value’ or ‘growth’ shares is very difficult in practice because there is no reliable indicator that predicts success. It is much easier to compare yields between individual shares as well as between shares and fixed-income securities. Yields represent the total market view of the risk/return equation. Yields are usually high for a reason (i.e. one or more risk factors). So do your homework, find out what the market is scared of and follow your judgement.

Usually it will be better to avoid the highest yields available in any asset class. There is, in any case, a spectrum to suit your appetite for risk:

Around 4% for ‘risk-free’ UK gilts (excluding inflation risk)
Around 5% for several FTSE 100 dividend shares or income-oriented ETFs
Around 6-7% for many fixed-income securities
Around 8-9% for some of the riskier fixed-income securities (e.g. PIBS)

4) You can combine different assets classes for less volatility

I use two main asset classes (‘half and half’): dividend shares and fixed-income securities. And there are many flavours of the latter, such as corporate bonds, preference shares, gilts, PIBS, enhanced capital notes, etc.

These two types of assets tend to complement each other: when the market is fearful, fixed-income yields are high; when the market is happier and businesses are going great guns, dividends are high.

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83 comments so far. Why not have your say?

Nice article, but the yields mentioned must be from another planet........current yields are much lower these days, particularly in bonds.

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I invest largely for income,but must point out the obvious....... if you need the divis to boost your income you can't reinvest them!

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jaybird - in fact, the yields mentioned aren't particlarly ambitious. I have divis ranging from 7.8% to 13.4% - and I've had a 13.02% stock for well over a year with no shocks - so it's not a risky one. If you want my spreadsheet page with lots of high-income-producing shares, plus their yields and other useful info, just reply to this requesting it.

Eric JH

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I don't need the income and I DO reinvest.

Eric JH

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Eric,so would I if I didn't need the income!

I don't know the point you are making,but I was merely referring to the script in para1.)where the writer mentions'retiring from the rat-race and needing income to cover one's lliving expenses'

In another life,some years ago I also reinvested..

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Mr Eric Hancock,

May I take up your kind offer of a copy of your spread sheet etc. I have a varied selection of variable and fixed, with preference for Inv Trusts where possible/realistic. Am a newcomerto this messaging thus uncertain how copies sent - if required thus my email is dcs2009@hotmail.co.uk.

Many thanks.

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Hi Eric,

Would appreciate you send your spreadsheet to savedelhi at Yahoo dott com

Thanks

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and me Eric please

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Could you possibly send it to me too please, at sjcoady@clara.co.uk. Many thanks.

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And me please at davidfxwalker@aol.com

Many thanks your generosity

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Dear ERic (sic) Hancock,

I have Shell, Unilever, RSA, Aviva, several utilities. Gilts & Corporate Bonds are usually not volatile but they owe their current levels to QE. At some point the Gilts bought with money created out of thin air are supposed to be sold back to the public/institutions. This makes them extremely risky in my view. I won't buy booze or baccy shares.

Otherwise I would be interested in seeing your spreadsheet please.

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Eric, I too would very much appreciate a copy of your spreadsheet please. To pfpea@tesco.net

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Eric,I am a new starter,could you please send me a copy of your spreadsheet.

davidbutterfield1000@yahoo.co.uk

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Hi ERic

I would be grateful if you could forward to me your spreadsheet

I am vry much a novice at the moment

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Eric

You will be kept busy! Please add me to the recipients:

jeremybosk-disposable@yahoo.co.uk

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Yes please add me to your recipients:

eileenobrien1988@hotmail.com

thanks so much

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Hi ERic,if you can spare a minute can I also please see your spreadsheet siblemike2@gmail.com

Thanks

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Blimey! seeing is believing, they say. I won't burden you further Eric. I'll stick to a mix of high(ish) yielders and growth shares.

It seems a bit dodgy broadcasting one's email address; I get enough spam asis.

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Another please Eric to simmobum@blueyonder.co.uk

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A well known risk with very high yielders is a likelihood they can be on their last legs.

For me, 2011 was pure trauma, but now all is redeemed, and some; I buy and hold.

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On second thoughts though, of course one could employ a disposable email address.

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Ah Jeremy, I see we use the same email service; perchance with bt?

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Please a spread sheet to hemnell3360@gmail.com,. Thankyou

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ok, me to, Jakeandbarbara@hotmail.com

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HI Eric,

I'd very much appreciate a copy of your spreadsheet too please.

mail@philwood.co.uk

Many thanks

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Don't buy PIBS. They are not what they were and you could be caught out.

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ERic,

I reckon that's the first and almost certainly the last time you make such a public spirited offer. I hope your strategy continues to be successful or else you may be receiving some less than complimentary emails in future!

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Maximising total returns from dividend growth investing works best when one is able to ascertain which FTSE350 dividend paying companies are 'high quality' and 'historically undervalued', at the same time, as per our financial strength and valuation methodology

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Eric, please send me your spreadsheet as well. thanks. b.s.s.r@hot mail.co.uk

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an elder one

Yes. You are right about the need to use throwaway email addresses when posting to public places such as this.

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Yes please Eric ,sounds good . bobbtx@yahoo.com

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Hi Eric! Please add me to th recipients list bakoelectricity@yahoo.com

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Hi Eric, a basic list on here would make your life easier ?

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Hi Eric, a basic list on here would make your life easier ?

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Eric Hancock

My I also take up your kind offer of your spreadsheet etc, I am very interested.

rdm911@hotmail.co.uk

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Hi Eric, without troubling you to send yet another email, I was also wondering if you could post a basic list here... or maybe post the spreadsheet in google docs or dropbox and post the link, that way you can be left alone without bombarding email requests :-)

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Wow - what a response! Such a lot of you want the spreadsheet - I'm amazed. Simply posting a list of the companies wouldn't be all that helpful, you need the sheet with its autofilter to sort them by NAV, EPS, P/E, Divi level, etc., which is (or at least, I find it) really useful. For example, the top three divi-producing shares are ALPH, IRP and OFF, the three lowest P/Es are ACHL, OFF and TLPR, the highest divi covers are ACHL, CLLN and TLPR.

But other research may be necessary before plunging all your money into these shares, obviously. I'll send a couple of very useful links for that activity, as well. I'll be forwarding the sheet during this morning, don't worry, plus a short instruction example which, (even though most of you are men like me who only look at the manual as a last resort) is well worth quickly going through to understand how it works.

Good luck and I hope it gives you some ideas.

Eric JH

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thanks for the reply, in that case, can you add me to the list at: lw2013@3dink.co.uk

Thanks

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Me too please rdm911@hotmail.co.uk

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Hi Eric. Can I have a copy of the spreadsheet please ?

harrywebb059@gmail.com

Thanks in anticipation.

Harry

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Mike the Bike

Actually, this is the second blog on which I've made this offer but this time response has been far greater. I'm happy to do it - I'm an old retired geezer with little else to do. As to whether the strategy works - there isn't one; the sheet simply lists shares by different criteria and enables you to make a decision based on which criteria are important to you. So I'm not expecting any criticism, bevause any investments made will be yoyr decision, not mine

Eric

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Hi Eric!

Please add me to th recipients list nh@callconnection.com

Thanks

Neil

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H Laser

You asked for a copy, but didn't send me your email address.

Eric

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OrchardSparks

Same again - you didn't give me an address to send to

Eric

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Hi Eric!

Please add me to the recipients list

t.newcombe@espo.org

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Hi Eric,

I'm a beginner to investments so any ideas would be great.

eve6889@hotmail.co.uk

Many thanks

Eve

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Please could I have a copy Eric.

Many thanks.

davidkingston@fsmail.net

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Please send me a copy

alwynparker@googlemail.com

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Please could I also have a copy Eric.

Many thanks in advance .

fgguest@gmail.com

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Hi Eric

Please add me to th recipients list ketaluca@hotmail.com

Thanks

Luca

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Hi Eric

Please add me to th recipients list ketaluca@hotmail.com

Thanks

Luca

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Hi Eric,

Seems you have sparked a lot of interest!!

I would love to see you spreadsheet as income investing is totally new to me. I know I'm late to the party but if you are still compiling your massive email recipient list for this please add me in.

jlt at businessmailbox dot com

Kind regards,

Joe T

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Hi Eric, at the risk of being too late for the party could you please send me a copy of your spreadsheet to edwardandjo@btinternet.com.

Kind regards, ted wright

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Eric, may I have a copy too?

3Grouch@sky.com

Thanks, Ron

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I hate to be negative on here but has anyone actually looked at the share price performance of any of ERic's holdings of shares and investment trusts (posted 08.20 29th Jan) over eg 1yr and 5yr periods? High dividends are all well and good but the company's ability to grow is crucial too, no? Good luck with your investments ERic but my portfolio will earn from a combination of income and capital growth.

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Luckycontrarian

You would be right, if I had indeed held these shares over 1 or 5 years, but I trade in and out of them, getting whatever divis I can, in the meantime. My average hold of a share is 80 days. Mind you, that seems lethargic when you compare the average hold of all shares (bearing in mind institutions trade in and out automatically on computers) which, I read recently in The Times, is 17 seconds!!

Your approach makes sense if you buy and hold, but I like to trade - it's more fun - and I do still manage to make a profit - historically (for me since 2004), 45% of profit has come from trading profits and 55% from dividends.

Eric

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please can I have a copy of your spreadsheet

jimmy_choos@yahoo.co.uk

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Wow - ERic, you should have your own column, going by the interest you have sparked!

For those of you that are interested, my portfolio is described on my website

http://www.the-diy-income-investor.com/p/portfolio.html

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Thanks Income Investor - I'll have a look.

By the way - I'm far too old and know far too little to even dream of writing articles for financial publications - but thanks for your comments.

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Not sure if I am too late but Eric if you are still e-mailing your spreed sheet I would very interested as a new investor, thanks.

tobyemail@hotmail.com

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For more information on our dividend income and dividend growth investment strategy, see: http://dividend-income-investor.com/tour/

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Dear Eric,

...and yet another one to the following address please, if you are not worn out by the quantity requested.

ADDRESS: michaeldedge@freenetname.co.uk (The middle 'd' is Donald).

Thank you very much. I wish you good fortune with your portfolio stuff.

Michael

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Could I have a copy of your spreadsheet please to info@bryanandsue.co.uk

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Hi Eric, may I have a copy of your spreadsheet please. I am a beginner investor. Thank you.

Sean Lewis

Seanglewis@icloud.com

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please include me, Eric.

david.forge@sky.com

Many thanks

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Hi Eric,

I will jump on the band wagon as well, please send a copy of your spread sheet to:-

sgcsl1@ntlworld.com

Many thanks.

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Hi Eric

I have a holding in TLPR, VOD, GSK, AV.B which return reasonable divis but I'll be interested to see your spreadsheet to do some more research. My email address is jpshute@gmail.com Thanks

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Hi ERic

Can you please add me to the list if possible hitshah1@hotmail.com. Thanks very much.

PS you may be a geezer ( a great one at that, for offering your insight and info) But age is a state of mind and yours is certainly not "old"! All the best.

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and me too please dennisj9342@hotmail.co.uk thanks

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Hi Eric

I am a retired investor and is very grateful for your offer could I also have copy of your spread sheet if I am not too late.

Also could you please let me know what criteria you use to sell a share?

My email address is swarnag_2000@yahoo.com

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If you sre looking for FTSE 100 dividends try this site also gives the FTSE 250

http://www.topyields.nl/Top-dividend-yields-of-FTSE100.php

Don't pay for this information which is freely available.

Subscription to Investors Chronicle has been my best investment.

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Hi Eric, please could you email me a copy of your spreadsheet too? Thanks!

jenrava@gmail.com

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Fund of Funds

IMO, Investors Chronicle is level pegging with Sharescope software - which includes the Dow Jones newswire service - in the investing value for money stakes. You can get almost all the raw data elsewhere and free but the Sharescope analytical tools are hard to beat and they are very conveniently all in one place.

I also subscribe to the FT to keep up with world news more broadly - it has better coverage and much better writers and opinions than the BBC News web site.

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Fund of Funds

Thanks for that link to topyields. Good one!

Eric

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Hi Eric

Please send me a copy of spreadsheet as well; many thanks

ngsuichen@yahoo.co.uk

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Hi Eric,

If you are not overloaded with requests by now I would also appreciate a copy of your spreadsheet.

peterlittlewood47@gmail.com

Many thanks in anticipation

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Hi Eric

I would, like many others be grateful for a copy of your famous spreadsheet many thanks.

email an5yship@virginmedia.com

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Good morning Eric,

I have previously left a message to request the (famous) spreadsheet but not seeing a copy in this thread I assume the message got lost somewhere so I send a second time.

My address is the following for the spreadsheet:

michaeldedge@freenetname.co.uk

Thank you very much

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Like most of us, working alone can be very daunting and, the way the market is, very disconcerting! So any opinions one can get is always welcome. So, if you have time Eric could i trouble you for your wisdom? Its mikeclarkmcp@hotmail.com.

Many Thanks,

Colin.

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If not too late, this oap would appreciate you generous offer of a copy of the Spread Sheet.

Many thanks

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Daitomos mail address dtrees@o2.co.uk

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This is the third time I have made a post for your kind offer of the spreadsheet to michaeldedge@freenetname.co.uk

Thank you VM

Michael

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