After a lifetime of regular monthly pay cheques, mortgage payments, gas bills, insurance premiums, subscriptions, gyms, council tax and phone bills, our brains have the ups and downs of monthly cashflows imprinted. Stepping away from the work environment —guess what? It’s still mainly monthly expenses. For this reason you need regular and reliable monthly income to meet those ever-so-reliable monthly expenses.
Where do we find regular income today?
When pursuing a consistent rate of return over a set investment term, there are a range of investment options open to you. Our favoured approach is to invest in a portfolio capable of producing a consistent dividend stream to complement any capital growth.
This dividend-investing approach is one that has become popular, owing to the effects that the dividends have on total returns over the longer term.
Example: Return on FTSE 100 index (31 Dec 2009 - 31 Dec 2019)
In capital terms only, for the decade ending on 31st December 2019 the FTSE 100 returned a gain of 39.34% . In contrast, had you received the dividends generated the total return over the same period would have been a growth of 103.98%.
Making money make money:
get rich slowly.
We use compounding to create wealth for our clients — that’s where the “slowly but surely” comes in.
“Reinvest your dividends”, advises Edward Bonham-Carter, vice-chairman of fund management group Jupiter. “Lots of people in markets think it’s capital return and the expectation of p/e [price/earnings multiple] but over the long term it’s the reinvestment of dividends that investors make their money from.”
We can’t take credit for clarifying income investing: Warren Buffett owns 400 million shares in Coca Cola – since 1995 he has earned over $7 billion from Coca Cola without selling a single share. Last year Coke paid him cash dividends of $640 million, which is $1.75 million every day, including weekends. We follow the same philosophy — if it works, don’t break it!
Example:
If a £100,000 investment pays 3.5% income today, and that income grows at 5% each year, compounding that income means that at the end of fifteen years the annual income will be £13,530, which is 13.5% of where the investment started.
There is no capital growth at all in the above calculation, although the accrued income means that the capital sum would have increased to £208,000 with no capital growth at all.