What sort of sustainable income are clients after?

What sort of sustainable income are clients after?

Investors on the hunt for income may feel they are not exactly spoilt for choice but there are assets meeting and even exceeding income requirements.

Those leaving money in cash in high street bank accounts will have seen very little in the way of growth in their savings due to the historically low interest rates on offer for the past few years.

Add to this the increasingly inflationary environment and there are plenty of reasons for seeking income-paying asset classes now.

Among the most popular funds selected by clients using the Bestinvest Online Investment Service in February, six of the 15 had an income objective, including Fidelity Moneybuilder Income and the Tilney Bestinvest Income and Growth Portfolio.

More income, more risk

Investors’ priority is finding sustainable sources of income – assets which are going to continue to provide an income whatever macroeconomic factors they come up against.

But in order to get more income, investors typically have to take more investment risk.

Darius McDermott, managing director at Chelsea Financial Services, paints a familiar picture.

He explains: “Since the global financial crisis investors have been slowly but surely pushed further and further up the risk scale to find a decent level of income. Rising inflation is now exacerbating the situation.”

Inflation jumped to 2.3 per cent in February, rising much faster than expected, meaning it has already exceeded the Bank of England’s 2 per cent inflation target.

UK inflation remained at 2.3 per cent in March, prompting fears inflation will reach 3 per cent far sooner than previously thought.

“The days of 5 per cent interest rates on cash are long gone and very few cash accounts are higher than inflation now, which means savings are being gently eroded in real terms,” Mr McDermott acknowledges.

“If inflation reaches 3 per cent and interest rates don't rise, £100 could be the equivalent of just £93.26 in three years time. If it gets as high as 4 per cent then the buying power of the £100 falls to £88.47.”

Where bonds were once a reliable source of income, inflation is also eating away at that.

He adds: “Bonds may also suffer as the income paid is usually fixed at the time they are issued, so high or rising inflation can be a problem as it also erodes the real return you receive. 

“Finding a bond fund with a higher yield to compensate for higher inflation will be key. The trouble is the higher the yield, usually the higher the risk.”

Equity income

Many investors have typically relied on equities for their income needs, with many equity income funds continuing to pay out high levels of income.

Jason Hollands, managing director at The Tilney Group, suggests when it comes to sustainable, inflation-beating income, all paths lead back to equities.