Perspectives – Managing Income

For information purposes only. The views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.

In our final episode in the retirement income series we dig deep into the process of managing income.

Why is consistent income hard to find?

There are a number of reasons why funds generating a consistent income stream are relatively rare. One is that income has not been a factor that fund buyers considered, particularly in an environment where income as a style was out of favour. Funds were marketed on a total return basis – the dreaded one and three year performance tables. Fund platforms until recently mainly did not cater for natural income in any case, so even fund buyers who understood the benefits could not follow this path. So we ended up with a vicious circle, where managing income offered no benefit to either the client or the fund manager.

There is an additional reason, which ought to be obvious. Managing the income from a portfolio is hard and requires an additional amount of work. Given the environment that has existed for the past decade or so, it is now something of a lost art. Ask a range of managers what the yield on the fund is and they will quote the dividend yield on the portfolio or the gross redemption yield on their bonds. This can be quite different from the income which they accrue for distribution to clients in a period.

Our approach

A stable and growing income stream is something many clients desire, but they do not want it to come as at the expense of capital or with additional risk. Therefore, managing income is not a simple case of buying sufficient income producing assets, all the usual portfolio construction and asset allocation needs must also be met.

Our approach is to consider top-down portfolio construction, as we do on all our funds on a macro and thematic basis, with an additional process at the security selection level to ensure the desired income outcome is achieved.

As we are directly invested we can have a high degree of visibility of our income streams, at least over a twelve month time frame. Our bond income is accrued daily so we have excellent visibility here – this feeds into our income forecast. We do not make any assumptions about reinvestment of bond maturities which, given our portfolio is fairly short dated right now, are quite regular. In practice, this regular stream of cash flow from maturities will be invested back into equity or fixed income, as appropriate at the time.

The equity income stream is a little less certain, we know last year’s dividends and for most companies, large numbers of analysts are forecasting this year’s dividend, following guidance from the company, so in aggregate we have a reasonable outlook into the current year. These dividends accrue on the ex-dividend date – the day on which shareholders become entitled to the dividend and future share holders buy without the dividend. This date only changes marginally from year to year for most companies. We download all the forecasted dividends for our equities and REITs and these also feed our daily income forecast. With equities, we tend to get pleasant surprises most of the time as companies regularly pay ‘special dividends’ when they have excess cash.

A snapshot of our equity dividend forecast

Premier Miton Cautious Monthly Income Fund

Source Bloomberg as at 17.01.24

Forecasted income by asset class

Premier Miton Cautious Monthly Income Fund

Source Bloomberg as at 17.01.24

This level of detail enables us to know at all times what we need to do to maintain and grow the income stream into the future.

There are a number of natural ‘checks and balances’ when running a mixed asset directly invested income fund. In the long term, you might expect equities to outperform fixed income so you tend to be a seller of equity over time to maintain the asset allocation balance. These equity gains are in effect reinvested to increase the more stable, bond income stream. As we do not run an income ‘style fund’, we own at various times a fair amount of non-dividend paying ‘growth’ stocks. Gains on these can be regularly reinvested into higher yielding more mature equities. The key is a consistent and growing income stream from the fund as a whole. When equities are weak relative to bonds it is often the case that bond yields are relatively low so we can reduce bonds in favour of higher yielding equities. These are powerful arguments for a mixed asset approach to income generation.

The nirvana for an income investor

The nirvana for an income investor is the reliable consistent dividend growing stock with strong and reliable cash flows. These are rare but when identified can be a powerful driver in this type of fund. Generally, in these cases you need worry much less about the share price as this will eventually follow along behind the dividend, unless something major changes.

An example of this might be IBM. Over the very long term it has consistently grown its dividends, while its share price has had periods where it is in favour and periods of being out of favour. A retiree looking to live on these dividends should not worry whether the share price was strong or weak so long as their dividends were hitting their bank account reliably each quarter.

IBM share price

Source: Bloomberg 31.12.1991 – 12.12.2023
Past performance is not a reliable indicator of future returns.

IBM dividend history

Source: Bloomberg 31.12.1991 – 30.09.2023

We think income investing should be the bedrock of any approach to post retirement, but it does require the portfolio to be managed at an extra level. The total return must be managed, and an additional process must take place to forecast and manage the income.

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Risks

The value of stock market investments will fluctuate, which will cause fund prices to fall as well as rise and investors may not get back the original amount invested.

Forecasts are not reliable indicators of future returns.

IMPORTANT INFORMATION:

For Investment Professionals only. No other persons should rely on the information contained within.

Whilst every effort has been made to ensure the accuracy of the information provided, we regret that we cannot accept responsibility for any omissions or errors.

The views and opinions expressed here are those of the author at the time of writing and can change; they may not represent the views of Premier Miton and should not be taken as statements of fact, nor should they be relied upon for making investment decisions.

Reference to any particular stock/investment does not constitute a recommendation to buy or sell the stock/investment

A free, English language copy of the Prospectus, Key Investor Information Document and Supplementary Information Document are available on the Premier Miton website, or copies can be requested by calling 0333 456 4560 or emailing [email protected].

Financial promotion issued by Premier Portfolio Managers Limited. (registered in England no. 01235867), authorised and regulated by the Financial Conduct Authority, a member of the Premier Miton Investors marketing group and a subsidiary of Premier Miton Group plc (registered in England no. 06306664). Registered office: Eastgate Court, High Street, Guildford, Surrey GU1 3DE.

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By clicking accept you acknowledge that your use of this website is subject to our privacy policy, cookie policy and our general legal and compliance information available on our website.

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“US Person” generally includes the following: (a) any natural person resident in the United States; (b) a partnership or corporation organised or incorporated under the laws of the United States; (c) any estate of which any executor, or administrator, is a US Person; (d) any trust of which any trustee is a US Person; (e) any agency or branch of a non-US entity located in the United States; (f) any non-discretionary account or similar account (other than an estate or trust) for the benefit or account of a US Person; (g) any discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary organised, incorporated or (if an individual) resident in the United States; and (h) any partnership or corporation if: i. organised or incorporated under the laws of any non-US jurisdiction; ii. formed by a US Person principally for the purpose of investing in securities not registered under the 1933 Act. In addition, a Shareholder must qualify as a “Non-United States Person” as used in the US Commodity Futures Trading Commission (“CFTC”) Rule 4.7.

Investment products referred to on this website may not be sold or transferred to a US citizen, or an entity taxed as such or required to file a tax return as such under the United States federal income tax laws (a “US Tax Resident”).

The information in this site is solely for the purpose of acquiring information as, or for, an Institutional Investor (a corporate or other non-retail investment professional acting for their own account). This information must not be used or relied upon by anyone that may be considered a “retail investor” by the home regulator of the country from which this site is accessed.  

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The information or opinions contained herein should not be construed as an offer, or solicitation to deal in any investment or fund nor shall any such investment products or services be offered or sold to any person in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful or in which the person making the offer solicitation is not qualified to do so or to anyone to whom it is unlawful to make such offer or solicitation.

Premier Miton Investors has expressed its own views and opinions on this website, and these may change and there is no obligation to update them. Nothing in this website should be construed as investment, tax, legal or other advice. The information contained herein is subject to change without notice.

Neither Premier Miton Investors nor any of its group companies or affiliates accepts any liability for any losses arising directly or indirectly from any information accessed from this website, to the fullest extent permitted by law.

By clicking accept you acknowledge that your use of this website is subject to our privacy policy, cookie policy and our general legal and compliance information available on our website.

THE UNITED STATES OF AMERICA: The investment products referred to on this website have not been and will not be registered under the United States Securities Act of 1933, as amended. They may not be offered or sold in the United States of America, its territories and possessions, any State of the United States of America or the District of Columbia or offered, sold or transferred to US Persons (as defined below). The investment products referred to on this website have not been and will not be registered under the United States Investment Company Act of 1940, as amended. Premier Portfolio Managers Limited has not been and will not be registered under the United States Investment Advisers Act of 1940.

 “US Person” generally includes the following: (a) any natural person resident in the United States; (b) a partnership or corporation organised or incorporated under the laws of the United States; (c) any estate of which any executor, or administrator, is a US Person; (d) any trust of which any trustee is a US Person; (e) any agency or branch of a non-US entity located in the United States; (f) any non-discretionary account or similar account (other than an estate or trust) for the benefit or account of a US Person; (g) any discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary organised, incorporated or (if an individual) resident in the United States; and (h) any partnership or corporation if: i. organised or incorporated under the laws of any non-US jurisdiction; ii. formed by a US Person principally for the purpose of investing in securities not registered under the 1933 Act. In addition, a Shareholder must qualify as a “Non-United States Person” as used in the US Commodity Futures Trading Commission (“CFTC”) Rule 4.7.

 Investment products referred to on this website may not be sold or transferred to a US citizen, or an entity taxed as such or required to file a tax return as such under the United States federal income tax laws (a “US Tax Resident”). If those investment products are held by a US Person, a US Tax Resident or a person who does not qualify as a “Non-United States Person” within the meaning of CFTC Rule 4.7, Premier Portfolio Managers Limited shall be entitled to redeem such Shareholder’s entire holdings.