The Search for Income

We have found that clients are putting increasing emphasis on their income requirements. The search for yield has become more important due to very low interest rates offered by banks and building societies of typically between 1-2%. These low rates have forced savers to look elsewhere in search of a more attractive yield.

Whilst an investment portfolio diversified across assets such as bonds, equities and property and infrastructure does not offer the capital security of a deposit account, it can offer an attractive yield which has the potential to grow over time. A typical diversified income portfolio can yield between 3.5-4%, as well as offer the potential for capital appreciation over time, allowing for good and bad years.

Where a bank account typically offers 1-2%, we might expect a well-diversified investment portfolio (predominantly equities) to produce a total return between 6-8% annualised over the long term. This expected return can be broken down as follows (please note, this is indicative only):

GDP growth of 2-2.5% per annum.
A dividend yield of 3.5% (roughly the yield on the FTSE 100).
The premium for owning risk assets over the long term of 1-2% (this is the additional reward which compensates investors for taking on additional risk).

If someone invested £100 in 1899 in the following savings vehicles, by 2006 it would have been worth the following (in today’s terms, i.e. after inflation):

Cash deposit £286
Gilts £323
Equities £25,022

Inflation is the biggest threat to savers over time as it erodes the value of capital. In a low interest rate environment, the source of income for savers is far less obvious, especially for those with a low capacity for loss. We are committed to constructing risk graded investment portfolios which can accommodate different risk profiles, whilst targeting specific income requirements.

 

Please note, this article is for information only and does not constitute investment or tax advice. Past performance is not necessarily an indication of future returns; the value of investments and any income from them is not guaranteed and can fall as well as rise; pension rules and tax legislation are subject to change; we do not give tax advice. If you would like investment or pension advice on your individual circumstances, please do not hesitate to get in touch on 01392 875500 or info@SeabrookClark.co.uk

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