Help in choosing where to invest for income?


#1

Hello,

I know a little about investments but not a lot. My Mum needs to invest money she’s inherited from her Mum to provide an income because she doesn’t have enough income to live on.

I am wondering about investment trusts because they pay dividends, well some do and some have been paying them for years, I read about City of London and Scottish Investment Trust.

She doesn’t need loads of income, around £600 per month would be enough and she has £260000. £15000 is in an ISA and we are thinking of putting another £15000 in an ISA too because there’s no tax to pay.

She doesn’t want it in a pension plan because she cant take it out when she wants.

What I need to know is should I just invest it all in two investment trusts? And where should we hold the investments. At the moment she just has a Barclays ISA but she can only invest it in a few funds and not Investment Trusts which seems weird to me.

Can anyone help me a little bit please?


#2

If your Mother only requires £600 per month, or £7200 per year then that works out to be less than a 3% yield which is easily achievable Chloe. She might struggle to get the same amount monthly, most pay either quarterly or half yearly, though some pay annually.

One thing to consider is she may be taxed on the income unless it’s in an ISA. This is dependent on her overall level of income from other sources. Is she retired and in receipt of a pension?

Also, how long is she investing for? Is it short term or long term because it should be long term if she is considering equities.

Is she okay with the risk of equities and how much risk does she wish to take?


#3

Hi Jeffrey. My Mum is 57 but because of a back injury she can’t work much. She is working in a local shop but she only earns £150 per week.

In terms of risk, she doesn’t want anything really risky or dodgy but she doesn’t want it to shrink a lot either which is what would happen if she put it in the bank.

The way I approach it and I’ve spoke to Mum a lot about this is she doesn’t have any real choice. Over the long term the stock market usually goes up yeah? There isn’t a guarantee on this but there is a guarantee that putting it in a bank account and taking the income means it will continually shrink in value for sure. We’re not rich people so what other choice do we have?

 

 


#4

Well you’re best putting it on a platform. I don’t know which one is best for your circumstance, I use Charles Stanley. They’re relatively cheap and easy to use.

John Baron has an income portfolio if you see the article on this site http://whichinvestmenttrust.com/investors-looking-direction-inspiration-look-no-john-barons-portfolios/

His Winter portfolio yields 5.5% but its focus on income at the expense of growth might not meet your Mum’s aim to protect the value as much.

You can check his Winter portfolio here: http://www.johnbaronportfolios.co.uk/

 


#5

@Chloe, how would your mother feel if her investments fell by 10%, or 20%, or 30%? Then ask, how would she feel if the investments fell by those amounts but the income from them increased, or at least, didn’t fall.

If her priority is income rather than growth (i.e. total return) then she should try to concentrate more on how to generate sufficient income for her needs - which could mean having to grow that income over hte years - and be less concerned about fluctuations in the level of her capital. But I do accept that that is easier for me to say than it is for someone else to do!

Does she want a regular income each month where the amounts are roughly the same? Or would she be OK if in some months she received a lot more than in others?

 

To get £7200 a year from £260,000 requires a yield of just under 2.8%, which is very reasonable and achievable. Another way of thinking, though, is that an initial 4% yield is also reasonable and requires investments totalling around £180,000 to generate the required income. The remaining £80,000 could be held in cash, which would help to reduce the volatility of the whole portfolio - unlike equities, the price of cash isn’t going to fall (in nominal terms).

Going back to the first set of questions, if markets were to fall by those percentages then they would affect only £180k’s worth of the portfolio rather than all of it: so 10%, 20% and 30% market falls would likely cause the whole portfolio to fall by 7%, 14% and 21% respectively.

 

You will see any number of suggestions for portfolios from both professional and private investors. All will have their merits and all will have their drawbacks - they are subjective opinions and will be based upon different views. If you are given the reasons why a particular trust, or combinaton of trusts, is suggested then you will be in able to decide how appropriate they are for your particular case. More information about particular trusts can be found on the AIC’s web-site: www.theaic.co.uk

[Tried to use the TABLE function but it hasn’t worked: I’ll put this as a place-holder until I can get something sorted]

 


#6

Thanks @arkwelder you’ve given us some things to think on and some options too because if she keeps some back in cash then for the amount invested she doesn’t need to worry so much about the income as long as it’s growing over the long term.

We have spoke about the stock markets crashing and after a lot of discussion she felt she would need the income and that that would be more important over the short term.

Thinking about declines in the value in the terms you put if she keeps an amount in cash puts it in a clearer perspective and is something I never thought about so thanks for going to the bother of working this out.

Also, she won’t be able to work forever so if it could be left to grow over the next 10 years or so she’d be in a better place.

So much to think on. Thanks again :slight_smile:


#7

Hopefully, the following link will work

That is a very basic spreadsheet of what I was trying to put in that other comment, along with the following commentary:

 

Share prices are the closing prices as of Friday 5th. The £255,470 is a rough guess at what cash would be available after transaction charges and stampy duty (where applicable) have been applied, plus an adjustment for actual offer prices. IT yields are calculated from the dividends paid over 12 month rolling periods, so a dividend that has been declared but not paid will be included and the oldest will drop out.

  • %Assets is the percentage of that holding of the total amount invested (i.e. excluding cash)
  • %Income is the percentage contribution which that holding makes to the total income
  • The Dividend Months section is used to roughly determine which periods the income will be received - a more accurate method is to use 12 monthly columns.
  • %Invested is the percentage that the holdings form out of the whole portfolio (after charges), leading to...
  • Cash being the amount of uninvested cash.
 
  • CTY, City of London IT
  • MYI, Murray International
  • LWI, Lowland
  • PLI, Perpetual Income & Growth
  • AAIF, Aberdeen Asian Income Fund Ltd
  • SCAM, Scottish American
  • JGCI, JPMorgan Global Convertibles
  • CMHY, City Merchante High Yield
I've assumed that equities will continue to provide a growing income over the coming years, preservation of capital is not a priority, so volitility in the value of assets is acceptable. And given the initial amount available for investment and the level of income required, that it will not be necessary to generate income by selling down capital.

But to repeat, the above are merely an example of what you could look at doing rather than specific fund recommendations.

 


#8

Hello folks! What happened to this discussion, it disappeared. When I logged on earlier this week it was gone.

Thank you very, very kindly for all the effort you went to @arkwelder and my Mum told me to make sure I pass on a big thank you from her too. Me and Mum have gone through this and we’re almost going to adopt your suggestions. The difference is she is only going to invest £240,000 and use the remaining £20,000 are roughly three years worth of income at £500 per month.

The rest of the money she will invest in the investment trusts @ArkWelder suggests but not take the dividends out.

It means the money invested has three years to grow before she’'ll touch it. In three years time she’ll sell one years worth of income and take it that way.

Good idea?

Mum feels a little bit more comfortable with doing it this way because if the dividends suddenly drop she won’t need to sell some of her holdings when the share price might be low.


#9

If your Mother won’t need to access any of the funds for three years and rather than taking the income you’re selling some of your holdings to fund the income you could take a little bit more risk with some of the money.

The portfolio that @arkwelder has suggested is great, but he produced it to meet your £7,200 income need. I would be inclined to use invest a little in a Biotechnology and healthcare trust and maybe a little in a smaller companies trust like Scottish oriental.

Over the long term these should deliver you greater growth. Perhaps use Ark’s portfolio as your base and put 4% or so in to each of these theme’s.

 

 


#10

Just because she doesn’t want the income doesn’t mean she should invest in riskier investments PauS.

The suggested portfolio looks bang on to me. Got a bit of bonds and equities, I mean come on, she’s no spring chicken and there’s enough risk in the portfolio from Ark Welder (where did you think that name up from?) already.


#11

Both the portfolio from @arkwelder and the change from @pauls are perfectly valid @chloe it all depends on how your Mum feels about investing in riskier areas.

Personally I tend to agree with @Mousy that at her time of life there is perhaps enough risk in Ark’s portfolio already.

It sounds like you talk to your Mum about the various options anyway @chloe which is good. I hope it works out for you both and I’ll be interested to see what you pick.

Bye the way @Mousy you need to use the @ symbol in front of people’s names if you want them to know you’re talking about them.


#12

@Chloe, I’ll re-phrase a question previously asked: how would your mother feel if her investments fell by 10%, or 20%, or 30% and she then needed to sell some of them to deliver her income? This is the potential dilemma with selling capital to generate an income rather than just taking the dividends. What if the initial capital doesn’t grow over the next three years, but falls in value instead? A few charts, all showing returns with the dividends re-invested over 2 1/2 or 3 year periods:

Now go and look at the dividends that were paid out by these trusts over the same periods. You will see that the levels of the dividends have been far more stable and reliable than the levels of the share prices. And it’s more likely that share prices will drop than for dividends to be cut, especially with investment trusts.

As @PaulS has pointed out, the suggested ITs and their allocations were examples of how the required level of income could be achieved. You should also look at the assumptions that I said that I’d made with those suggestions: “I’ve assumed that…volitility in the value of assets is acceptable…it will not be necessary to generate income by selling down capital.

However, selling down capital is what you are proposing to do. With this requirement then the suggested investment trusts aren’t necessarily the best options - they’re certainly not ones that I would have suggested. Also, re-investing dividends has associated costs: the broker charge, and stamp duty for some of those ITs.

Selling incurs further costs: another broker charge, and a depreciation due to buying at offer prices and selling a bid prices (although this cost is hard to determine once prises have changed). Re-investing dividends and selling once a year to take out the income will reduce the level of income by the total amount of those charges. Much better, in my view, to take the dividends when they are due and to re-invest income that is surplus to requirements once a year or so.

If your mother does decide to invest a higher amount of her initial capital then she could increase allocations to the same ITs, or do as PaulS suggests and look at ones that have more of a capital growth focus and less emphasis on growing their dividends. But as @Mousy and @Buck have pointer out, such an approach isn’t necessary in this case and does carry a higher risk of decreasing the capital.

Your mother has sufficient capital to be able to generate all of her income requirement in the form of dividends; not everyone is that fortunate. I take the view that if dividends do deliver the required income then they should be taken. This takes away the risk of being forced to sell at depressed prices. Instead, sales of capital can occasionally be done to cover one-off larger expenditures, e.g. buying a new car, redecorating, etc. A strategy that relies on having to sell capital requires a more active approach to which funds are held, and when they are held, and when they are sold completely and replaced with another. Much simpler just to take the dividends.


#13

There is no rights or wrongs with this it’s just what’s right for you @chloe. In investing there are many paths that can potentially lead to the same goal. Your Mum’s goal is to deliver £7200 of income per year, to leave something behind and to have ready access to her money.

That is what @arkwelder has proffered and I find it hard to disagree with anything he said (and he explained it incredibly well).

There are no definites in investing and so this portfolio can’t come with guarantees but there is the reassurance of history and if I can suggest something else, perhaps if your Mum has say one year of income held back in reserve it would giver her the peace of mind she desires.


#14

Thanks for the comments and feedback. I need to talk this over with Mum now and show her @arkwelder’s lovely colourful charts. I’m seeing her tomorrow but we’re going shopping for final Christmas stuff so I’ not sure we’ll get the chance to discuss this.

What I think I’m trying to very badly state is I don’t think we’re going to get a chance to go properly over this before Xmas so please bear with me, I don’t want this to lose momentum because I’ve gone away.

I am very very appreciative of all of the lovely kind effort your guys have gone to. :slight_smile:

 

 


#15

@Chloe, I hope you are still watching this space! For my bit I will add that selling down capital does not seem to be the way. Income only tends to fall if the market is in real trouble and Investment Trusts (IT) have this income buffer, income reserve, that can cushion such events like this and specifics like BP stopping dividends. I run two income models, one more diversified than the other but slightly less income, and they work on the basis of an IT. 10% is held back (although ITs can hold back 15%) and not paid out. This buffer is then used to alternate between purchasing more stock or increasing the payments out. Over time one can increase what you get in order to keep up with inflation, or even beat it. You must look at dividend growth of the ITs you go for that collectively beats inflation. £600 per month will buy you 30% less in 12 years at 3% inflation! Try this if interested http://www.pigottsinvestments.co.uk/Performance/graph.asp