Not putting all your eggs in one basket
Everybody has investment goals in their life, from the old adage of saving for a rainy day to planning a comfortable retirement. There are many reasons why investors might seek an income stream from their investments, for example, to pay for a dependant’s education, supplement a pension or fund the cost of care, yet achieving it can be hard.
A ‘do-it-yourself’ approach may often seem attractive to some investors who buy a handful of dividend-paying stocks and receive the income from these. There are many companies that have long track records of consistent dividend payments, and these are often household name firms. However, it’s important to diversify – it’s the age-old cliché of not putting all your eggs in one basket.
Consistent dividend payer
Just because a company has been a consistent dividend payer in the past does not mean it always will be in the future. Investors need to be sure that they have properly assessed the risks around a company (and its industry) in order to be confident that dividend payments can continue.
Conducting all the necessary research is a complex and time-consuming undertaking, so it’s no surprise that many income investors prefer to leave the heavy lifting to a professional fund manager. Funds focused on equity income will invest in a range of stocks and will have a target income yield that they aim to deliver each year.
Different types of fund choice
The theory is that holding a range of stocks leaves the overall portfolio less reliant on each individual company. If a few firms cut their dividends or see their share prices fall, hopefully others in the portfolio will offset this by raising their dividends or otherwise performing better than expected.
While there are many different types of fund to choose from, investors need to be wary of the limitations of focusing on a single region. A second reason in favour of diversification is that some regions have higher dividends than others.
Greater depth of sector opportunities
Some investors may prefer funds that invest in their home market. This has the advantage of eliminating currency volatility. But, it can mean missing out on the higher income or more diverse range of opportunities offered by other regions. It’s not just a wider group of individual companies that is available to global investors, but a greater depth of sector opportunities too. Therefore, by diversifying, you can hold a global equity income portfolio that avoids the sector skews of any one particular region. It can also help to mitigate potential currency volatility, as the various different currencies will rise and fall against each other at different times in the economic cycle.
Maintaining a balanced approach
Investment strategies should often include a combination of various fund types in order to obtain a balanced approach to risk and reward. Maintaining a balanced approach is usually key to the chances of achieving your investment goals, while bearing in mind that at some point you will want access to your money. This makes it important to allow for flexibility in your planning. Whatever your personal investment goals may be, it is important to consider the time horizon at the outset, as this will impact the type of investments you should consider to help achieve your goals.
INFORMATION IS BASED ON OUR CURRENT UNDERSTANDING OF TAXATION LEGISLATION AND REGULATIONS. ANY LEVELS AND BASES OF, AND RELIEFS FROM, TAXATION ARE SUBJECT TO CHANGE.