Value stocks can enhance your income, but this comes with added risk. It is important to use price targets when buying these stocks as they can quickly reverse course.
Growth stocks are those that display faster-than-average revenue and earnings growth and have strong price performance. These companies display margin stability and some pricing power. They tend not to pay high dividends, but are likely to grow dividends overtime.
Growth stocks trade at a premium to the overall market and they can experience severe setbacks when their growth starts to slow. It is important to use stop losses and avoid stocks with bad price performance in this group.
Alternative assets such as property and infrastructure can provide an additional source of income within portfolios. Although these assets tend to have a high degree of sensitivity to the broader economy and therefore equity markets, they often have better risk-adjusted returns.
Rely on natural yield
One of the key drawbacks of being an income-focused investor is the persistent need to remove capital from the portfolio. This removal of funds can be achieved through the sale of investments in low-yielding assets or by withdrawing cash as it is paid out by assets with natural yields (coupons, dividends, rental yields).
While market conditions can certainly impact the performance of natural yield investments, focusing on natural income allows you to rely less on trying to time the market when selling assets. This allows you to remain invested during periods of heightened volatility leading to better longer-term outcomes as a result.
The use of mid-risk assets further improves long-term, risk-adjusted results, as these assets tend to have lower long-term volatility than equity markets and offer a significant upfront return in the form of higher yields. High-yield bonds, for example, are currently yielding 9 to 10 per cent.
Even assuming significant levels of defaults over the next three years, investors can make equity-like returns while benefiting from higher-than-average income generation.
Dynamic asset allocation
One of the key risks to income portfolios is the impact of pound cost ravaging on long-term wealth. If a portfolio experiences a severe drawdown, each income withdrawal limits the client’s ability to regain lost wealth.
The depth and length of the drawdown are both important and it is therefore important that investors adopt a dynamic approach when allocating to assets with higher volatility such as equities and property.
