The power of income | Benefits of Investing | Liontrust Asset Management PLC

The power of income

If you ask investors whether steady income or share price growth is more important for long-term equity performance, many might opt for the latter. The reasons for this are obvious, with the tortoise of regular income often eclipsed, in investors’ minds at least, by the hare of doubling your money via the next big stock idea.

In reality, long-term data show the huge impact income can have on investment returns – over the last century, around 75% of the return from UK equities has come purely from the dividend yield according to the well-respected Barclays Equity Gilt Study.

This is often forgotten in bull markets, when investors are chasing big gains in share prices. In the 1990s, for instance, the market was rising sharply thanks to popular technology shares that paid no dividends. Back then, companies that paid out a share of their profits in income rather than reinvesting everything in the business were seen as staid, slow-growing laggards. This soon reversed when the tech bubble burst, when many businesses folded and investors remembered the benefits of solid blue-chip, dividend-paying companies.

Barclays’ annual study shows reinvesting dividends can make a significant difference to overall returns in the long term. An investment of £100 in shares in 1899 would have been worth only £191 in real terms at the end of 2013 based on capital growth in the Barclays UK Equity Index alone. If, however, all the dividends had been reinvested, the total value of the portfolio would have soared to £28,386 over the same period.

The impact of dividends has been greatest over very long periods but it is still significant over the shorter term as well. For example, £100 invested in 2003 would have been worth just £118 in real terms at the end of 2013 (Source: Barclays UK Equity Gilt Study). With income reinvested, the total value would have risen over the same period to £164 – almost 40% more.

Equity income funds can be a good long-term savings vehicle for investors able to tolerate the additional risk, with the potential for capital growth along with the compounding effect we have highlighted.


Today's value of £100 invested at the end of 1899, with and without reinvesting income

Source: Barclays Equity Gilt Study 2016

Benefits of overseas exposure

Paying out a portion of profits to shareholders in the form of dividends has long been a regular practice for many of the UK’s companies and funds focused on these dividend-paying stocks have become a staple investment for many people in Britain.

Around the world, the dividend culture has been less established generally and companies have traditionally preferred to reward their shareholders in other ways. In the US, for example, businesses have typically used excess capital for share buybacks: these are designed to reduce the number of shares available in the market and should theoretically increase the value of the remaining share capital.

Companies in international markets, however, are increasingly going down the dividend route. For UK investors, this means there is a much wider choice in the equity income space. UK equity income funds remain as popular as ever but investors can now also select income funds investing in Europe, the US, Japan and Asia, as well as global offerings that select from the best dividend-paying businesses from around the world.

Taxing question

An important consideration when investing for income – particularly if you are using regular payments to fund your retirement – is your tax situation. There are a range of tax efficient wrappers available in the UK – primarily Individual Savings Accounts (ISAs) – that allow you to shelter income from tax but we suggest you consult a professional adviser about these and the other implications of receiving an income from investments.

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