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Quick Tip: Income Generating Portfolios

By beled | July 5, 2013

Conventional wisdom suggests that an income-generating portfolio must comprise assets which deliver either interest or (relatively) high dividends.  Simple enough logic and true, in that a portfolio structured along these lines most likely will deliver the necessary income, but there is a caveat: by chasing yield you run the risk of undermining the portfolio’s structure and therefore its potential for capital growth.  The solution?  Optimal portfolio structuring for an ‘all-in yield’ where you have the benefits of both income generation and capital growth.

David Leslie, MD of Belmont Asset Management comments: ‘An ‘all-in-yield’ simply means that the required income is drawn from the total return delivered by the portfolio during the relevant period.  This will, in part, be made up of interest and dividends, but also draws on some of the capital growth achieved.

‘Of course, it’s never quite that simple and there is an important point worth noting.  Devoting your portfolio to growth assets, such as high quality shares, should deliver annual returns well in excess of inflation, thus protecting the real value of the capital.  Nevertheless, it is recommended that not more than about 4% of the total portfolio value is drawn each year.

Leslie concludes, ‘The message I want to emphasise is: don’t chase yield at the expense of a well-structured growth portfolio.  There are better options available.’

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