Retirees cautioned to be aware of 'fake income'
PUBLISHED
2018-05-23
Content
Investors, especially retirees, seeking income from their investments have today been cautioned to be aware of fake income'. [1]
"While fake news' is now a common catch phrase, income investors also need to be aware of fake income', said Don Hamson, Managing Director of Plato Investment Management (Plato).
Dr Hamson explains that real income' is the income derived from investments in the form of interest, dividends (including franking credits) and rents.
"It should not include realised capital gains as these amount to capital returns not income returns.
"Some of today's investment opportunities blur the income/capital definition. For example, term annuity income' payments usually reflect both income and return on capital. Similarly, the income' distributed from managed funds may represent a combination of real income (interest, dividend and rents) and realised capital gains from an increase in stock prices.
"Investors need to tread carefully around investments that pay out high levels of income' at the expense of a declining capital value.
"Income-focused equity investors should seek to grow their capital base while generating that income. Income can be derived with a similar, or even less-than, market level of risk.
"Higher yield stocks may actually be less risky than low or zero yield stocks, to the extent that small risky growth companies often pay very low dividends, if any, whereas what are considered safe and mature companies such as the Australian banks may pay handsome levels of income.
"We also note that high historical dividend yields, caused by falling share prices, could suggest poor prospects for that company and a high likelihood of dividends being cut in the near future. At Plato, we proactively avoid stocks which are likely to cut dividends, stocks we call dividend traps'.
Dr Hamson also explains that "income should also be real', in the sense that it is adjusted for inflation. For example, the current official overnight cash rate is 1.5% p.a. in nominal or pre-inflation terms, but after allowing for the current 1.9% CPI inflation rate, overnight cash is actually earning a negative real rate of return of -0.4% p.a.
"Income investors need to be aware of these fake income' traps, if they are seeking increased income from their portfolios.
A 2017 Plato survey found that 29% of respondents sought income greater than 7% from their portfolios, closely followed by 21% of respondents expecting 6-7%, and 29% expecting 5-6%.
These levels can't be generated by fixed income or typical low bank term deposits. "Meeting these expectations requires equity dividends, combined with a smart and sustainable investment strategy, concluded Dr Hamson.
[1] Pension phase investors represent almost a quarter of Australia's $2.5 trillion superannuation pool, with many seeking a regular investment income to supplement the government pension.
About Plato Investment Management Limited
Plato Investment Management Limited (Plato) (ABN 77 120 730 136) is an investment management firm specialising in maximising retirement income for pension phase investors and SMSF investors.
Plato was founded in Sydney by Dr Don Hamson and currently manages over $4.5 billion in FUM (as at 31 December 2017). Plato is majority owned and operated by its investment staff and supported by its minority equity partner, Pinnacle Investment Management Limited, a leading multi-affiliate investment management firm. For more information please visit www.plato.com.au
Author
| Name | Dr. Don Hamson | Don Hamson is the founding Managing Director of Plato Investment Management. He is well known as a leader in the practical application of after-tax investing.
Prior to forming Plato, Don was Head of Active Equities, Asia Pacific at State Street Global Advisors. Don has also held various positions at Westpac Investment Management, including Chief Investment Officer and Head of Equities where he managed a $1B Imputation Fund. |