Planning for income and capital growth beyond 2015

Income and growth in income are key factors for investors to consider

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The current investment environment, characterised by economic uncertainty and volatile markets, coupled with a choice of over 1 000 unit trusts and a myriad of different products, has made the simple act of investing a difficult and often stressful endeavour. An exclusive focus on capital growth has further complicated this process. To simplify investment decision making, Marriott recommends that investors should invest for income.

When investing, it is important to recognise that the major drivers of return relate to the income characteristics of an investment: Income yield and income growth.

Income yield – The majority of investments produce income such as dividends or interest: Reinvesting this income allows for the accumulation of more income producing capital. This process of reinvesting income can be a major contributor to return over time. Bonds and cash are typically higher yielding asset classes.

Income growth – Income growth from an investment is the primary driver of capital value growth over time. This is evident when looking at the dividend and price history of Procter and Gamble in the chart below. Consequently, growth in income can also be a major contributor to return over time. Equities produce the highest level of income growth; however, the trade-off is that this asset class offers investors a relatively low income yield.


Re-investing the income received from high yielding asset classes is a more predictable way of generating an investment return as the rate of capital accumulation is known upfront. Asset classes which generate income growth offer the potential for higher returns; however, the outcome may be less predictable as income growth from certain equities can be volatile. This is evident in the dividend track record of a well-known resource company listed on the JSE - Goldfields:

Consistent and reliable dividend growth from our equity portfolios is achieved through a security-selection process which filters out companies vulnerable to current economic conditions, which operate in unpredictable industries or have specific risks to dividends such as too-much debt or risky business models. The charts below highlight the reliable dividend track records of four companies currently held in Marriott’s equity portfolios:

It would be reasonable to assume that this conservative approach to equity investing would yield below average returns. However, this is not the case. A number of studies have shown that companies that pay dividends, and grow them, tend to outperform the market over the long term. The chart below outlines the performance of the Marriott Dividend Growth Fund (Marriott’s South African Equity Fund) over the last decade.

In summary, knowing the income yield and ensuring reliable income growth from a portfolio will significantly reduce the complexity and unpredictability associated with investing. With this information it is possible to have a reasonably accurate idea of a likely investment outcome.

Marriott has created a simple and intuitive Investment Planning Tool which is available on our website (www.marriott.co.za) to guide investors in the construction of a personalised portfolio of investments based on their desired income yield and a commensurate level of income growth.

 

Duggan Matthews, investment professional at Marriott Asset Management

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