23 Aug 2024
Authors | Anne Breen, Global Head of Real Estate | Fergus McCarthy, Head of UK Investments Wholesale Distribution | Jamie Irvine, Investment Director | Matt Williams, Senior Investment Director
Why it could be well worth your client staying invested in a wide range of income assets.
From 1995 through to today, the cumulative rate of inflation in UK pounds has been just under 141%. A pound today only buys about 41% of what it could buy back then. Your purchasing power has more than halved within a generation (1).
One way to mitigate inflation is to invest in assets that provide a steady stream of regular income. Equities, bonds, and real estate can all provide great opportunities for cashflow generation that can help you keep pace with or even exceed inflation rates. This can help preserve purchasing power over time, albeit income levels are not guaranteed.
By investing regularly, and staying invested in income-generating instruments, you fully benefit from a) not missing out on the best trading days and b) not missing out on income through your investment period.
The chart below shows it pays to stay invested and reinvest your income. Here, we’ve focused in on UK equities. You’ll see that if a client had invested £1,000 in the FTSE All Share at the beginning of July 2004, stayed invested, and reinvested all their dividends, they would have built up over £4,000 by late June 2024. A client who stayed invested over the same period, but didn’t reinvest their dividends would have ended up with around £2,000.
Price return vs total return
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Source: abrdn, LSEG Datastream, 1st July 2004 to 30th June 2024
For illustrative purposes only. Past performance is not a guide to the future.
Are you an active income explorer?
Of course, domestic equities is just one of the options for income investors. Diversifying across sectors, global geographies and asset classes can help your client reduce risk, enhance resilience, and, potentially, boost returns. Diversified sources of cashflow can act as a buffer through economic cycles and reduce vulnerability to market-specific downturns.
Invest in bonds for a stream of regular income
When you invest in a bond, you’re lending your money to a company or government for a fixed period. Bondholders get regular interest payments, known as coupons, over the life of the loan.
The attraction of bonds is that they represent an opportunity for an investor to secure a stream of regular fixed income. There’s also an element of capital protection, because issuers return the face value of the bond to investors on maturity.
Of course, it’s important to steer clear of risk. An experienced team with an active approach and deep research capabilities can help.
Bond yields have reset to near decade-highs thanks to interest rate rises. Investors who get on board now may be able to lock in today’s high yields. They could also benefit from capital gains when interest rates fall.
For a balanced equity strategy, consider equity income
Many companies return income to shareholders in the form of dividends. Dividends are typically less volatile than share price performance, so can provide a cushion when markets are choppy.
In an environment where interest rates are higher for longer, equity income strategies that derive part of their total return from dividends have the potential to help investors generate a return above the prevailing interest rate.
A dividend-driven active manager seeks out stocks with the potential for growth and income. With an active approach, it’s possible to build a balanced, diversified portfolio of companies, minimising risks, and maximising opportunities.
It’s well worth exploring undiscovered equity income areas like emerging markets, where you’ll find a varied and attractive income hunting ground. You might be surprised to learn that nearly 40% of companies in emerging markets pay a dividend over 3%.(2)
Stay on track for real income from real assets
Real estate offers investors diversification, long-term cashflows and the potential for future growth.
Illiquidity and income risk mean the asset class typically carries a yield premium over lower-risk fixed-income yields. Many underlying assets have leases in place contractually linked to inflation. This enhances real estate’s appeal to investors.
Performance is increasingly driven by structural forces and polarisation across sectors as well as quality, sustainability, and location. Getting these factors right is critical to success. That’s why we believe in being research-led, with a truly collaborative approach.
Investors might want to consider new and emerging real estate themes, such as private rented residential, student accommodation, modern logistics or data centres.
In our view, now is an opportune time to start thinking about real estate allocations again, given that substantial re-pricing risk is now behind us.
We believe investors with a clear focus on identifying tomorrow’s winning markets can benefit from the best of what real estate has to offer.
Discover more with us
So, if you’re seeking income, growth, and diversification for your client’s portfolio, take the road less travelled. Set out in search of resilient real estate revenue. Go off the beaten track for your bonds. Or take a detour into undiscovered equity subsets. Find out what abrdn Investments can offer your client by visiting our income pages now.
Risk warning
The value of investments, and the income from them, can go down as well as up and an investor may get back less than the amount invested. Past performance is not a guide to future results.