FSA Guide to the Art of Income Investing - HK Version 2016 | Page 4
INTRODUCTION
Editor’s viewpoint
THE ART OF
INCOME INVESTING
to load them with assets.
Investing for income requires constant vigilance. The source of the income and
its quality will vary over time making this a highly dynamic investment process.
With interest rates at record lows and elevated volatility, managers are being
tested but are proving that opportunities still exist in a variety of assets.
S
trong market volatility that began
late last year and has spilled
over into 2016 is telling us that
investors are pessimistic about the
global economy. Indications are that
the four US interest rate hikes the
US Federal Reserve had planned this
year are unlikely. But regardless of the
number of rate increases, the widely
held expectation is that any increase
will be gradual and puny. Europe
and Japan are likely to lower rates, if
anything.
Low interest rates are here for
years, some might say decades. Add in
volatile global markets after several
consecutive years of low volatility, and
that dims the outlook for investment
returns.
The stage is therefore set for income
investing as an investment philosophy:
Getting products to pay the investor
regularly, just like the bank used to pay
interest on savings.
Products are everywhere, but
selection is not easy. Identifying
investments that generate predictable
cashflow is both skill and art. Will the
income generated be there next month?
Conditions change rapidly. The best
example is government bonds, which
used to provide safe, consistent, longterm returns. Now $6trn in government
bonds globally have negative yields.
4
Of course, bond yields can still be
found -Greece and Brazil government
bonds are paying high single digit
returns – but the trade off is higher risk.
The same is true in high yield corporate
issuance, a re-labeling of what used to
be called junk bonds. Much depends on
understanding not only the company’s
ability to service its debt, but how macro
forces impact on the issuer. Balancing
yield and risk are at the core of income
investing.
Drew Wilson
Editor,
Fund Selector
Asia
In equities, the choice for regular
income has been listed companies
with a long track record of increasing
payouts. The ideal is 3-4% dividend
yield plus 3-4% underlying growth of
the stock.
A variety of other types of equity
instruments also offer income. Business
development companies (BDCs), real
estate investment trusts (REITs),
master limited partnerships (MLPs)
and royalty trusts are among them.
Investors can also look at the many
flavours of exchange traded funds
that invest only in dividend-paying
corporates.
A relatively new byproduct of the low
interest rate environment is the yieldco,
a public company formed by the parent
company to hold operating assets.
Yieldcos generate predictable cashflow
and pay dividends, but also give growth
because the parent companies continue
Dividend-paying equities, like
bonds, need to be carefully examined.
Corporates can cut dividends.
According to research firm Markit,
aggregate dividends payouts are
expected to grow at 5% this year
compared to 9.3% over the prior
four years. The lower growth is due
largely to commodities companies
– traditionally high dividend payers
– chopping their payouts due to rock
bottom commodity prices. And when
the dividend is slashed, the stock price
typically follows.
Ref lecting these themes, the
following articles look at some of the
challenges of income investing and
suggest how investors can maximise
sustainable income with an eye on
balancing yield and risk. FSA
60%
MSCI World High Dividend vs S&P 500
3 year %
40%
20%
0%
28/2/13
31/12/13
31/10/14
Index : MSCI World High Dividend Yield GTR
Index : S&P 500 GTR in US
31/8/15
Fund Selector Asia Guide to the Art of Income Investing March 2016 www.fundselectorasia.com