The Citizen (KZN)

Equities play important role

DON’T DISREGARD DIVIDEND-PAYING SHARES.

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Achallenge for many investors and their advisors is how to generate a retirement income. How do you ensure your capital provides you with the income you need for as long as you need it?

One way might be to buy a guaranteed pension that gives you an inflation-linked increase every year. That way you know you won’t outlive your money and you have some inflation protection.

However, for some this may feel too inflexible as capital is locked in and personal inflation may be higher than the official rate.

“When putting an income portfolio together, asset managers and financial advisors have a spectrum of asset classes that deliver different types of income with different risk profiles and time horizons,” says CoreShares MD Gareth Stobie. “You can get income from cash in the bank, inflation-linked bonds, nominal bonds, the property market, or dividend-paying equities.”

Often the latter isn’t considered much, firstly because some people consider equities too risky in retirement. However if you retire at 65, chances are your money will have to last another 25-30 years, so the short-term volatility of equities should perhaps not be such an important considerat­ion.

Secondly, people might shy away from dividend-paying equities because they’re likely to deliver the lowest starting yield. If you’re looking for income from your capital, the 8.5% yield on government bonds, 7.5% forward yield on listed property, or 7% offered on a bank fixed deposit might seem more attractive than the 3% dividend yield on shares.

Yet, if one takes a slightly longer-term view, the picture changes significan­tly. Although bonds or cash may offer a higher starting yield, in a fairly short period this could be overtaken by rising dividends.

CoreShares compared the yield from 2004 on two R1 million investment­s – one into the R203 government bond at 8.25% and one into Standard Bank.

While the dividend paid by Standard Bank is initially less than half the income from the bond, this changes very quickly.

Starting in 2004, you’d have earned a R4 000 income from the share and R8 000 from the bond. “But within four years, the yield from Standard Bank overtakes the bond. That is the essence of an equity dividend strategy which is the ability to build that dividend stream over time,” says Stobie

So, if you take a long-term view, equities can play a significan­t role in an income portfolio.

 ?? Picture: Shuttersto­ck ?? TIME CONSIDERAT­IONS. If you retire at 65, chances are your money will have to last at least another 25 to 30 years.
Picture: Shuttersto­ck TIME CONSIDERAT­IONS. If you retire at 65, chances are your money will have to last at least another 25 to 30 years.

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