You might argue that the solution is to invest in a decent equity income fund run by a sensible manager – one who is genuinely investing in liquid, higher-yielding, large-cap equities and whose fund is not liable to be gated.
Or you may opt for a passive alternative.
There are a number of hidden risks with either strategy.
Income funds – active and passive – can be heavily concentrated in their top stock picks (by choice or because of the weight these stocks carry within their index due to their market capitalisation).
They can be biased towards certain sectors and styles. This can reduce diversification and raise volatility.
If interest rates rise then capital values may be sorely hit – these funds become vulnerable to a rotation away from income.
Opportunity costs
Clients not only increase risk by trying to live off investment income, they also miss out on opportunities.
They may overlook regions and sectors that tend to pay low dividends but which offer attractive overall returns.
Few of the great technology stocks that have driven much of the S&P 500’s performance in this market cycle deliver generous dividends, but the combination of yield and capital growth is impressive.
Microsoft, for instance, yields less than 2 per cent but its share price has risen five-fold in a decade.
Such companies have achieved their dominant market power and muscular balance sheets by prioritising investment in R&D and the goal of delivering sustainable returns for shareholders above generous dividends.
Emerging markets can look attractive at various points in the cycle. Their appeal is growing now. Few are currently predicting a rise in interest rates in the US.
In fact, there is a greater likelihood of a cut. The US dollar looks vulnerable to downward pressure, which can be good for emerging markets.
But that investment opportunity is denied the pure income investor, as few stocks in this sector pay a handsome dividend (though the situation is slowly improving).
Sailing in safer waters – combining income and capital
So what is the alternative?
Most clients living off their savings need a regular sum each month so they can budget expenditure.
This should be drawn from a combination of income and capital.
This means selling shares or units of funds they hold to supplement any dividend income. Doing so liberates them – and their investment managers.
It means you can concentrate on ensuring they have a well-balanced portfolio that can sustain them through several decades of happy retirement.
It means that, for now, you can avoid a portfolio heavily biased to bonds – assuming they can tolerate higher expected volatility – and your investment manager can buy them great companies from jurisdictions that tend to pay lower dividends but are thriving.
