Why you need an income engine

So, since the GFC, it has been better to hold the capital than seek income but with prospective returns now low and interest rates at some point likely to rise, this is going to change.

In practical terms, income will be a greater component of total returns going forward regardless of the inflation outlook.

Looking at the breakdown below you can see that from 2001 to 2007, even though the index as a whole continued to grow sales (4.7% p.a.), the starting valuations were so high that the sales growth was offset by a valuation de-rate (-35% p/e) such that the shares only increased 1.5% p.a.

However, if you had the income component, you boosted your total return by over 50% p.a. during that 7-year period.  

• a trade-off between yield and growth, 
• yields that are unsustainably high, 
• high volatility, and 
• greater sensitivity to risk-off events.

Finding a source of income that diversifies risk, does not result in markedly higher volatility, and changes the mix of savers’ returns to a greater balance of the capital and income components is important but not easy.

Not easy but possible - and in our case achieved through the implementation process, receiving a minimum 15% contracted rate of return per annum as a result of our commitment to buying a share we want to own. This flows through in the form of an income stream that is not dependent on a company’s ability or management’s desire to pay a dividend to shareholders.

In other words, an income engine.  

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