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A Unifying Force – The Multi-Asset Pathway to Income

  • There are currently 4.1 million retirees in Australia, with 140,000 joining their ranks every year.1 With this expansion comes the growing need to generate a sustainable income.
  • However, yield should not be chased at any cost, as capital growth ensures that retirees maintain their purchasing power over time.
  • Against this backdrop, we explore the different investment strategies available to income investors.
5 min read
ETF Model Portfolio Strategist
Senior Strategist

The average retirement age in Australia is between 62 and 65 years.2 At present, there are 4.1 million retirees in Australia, with approximately 140,000 people joining their ranks annually.1 By 2066, retirees are projected to make up between 21% and 23% of the total population.3 Therefore, the need to generate a sustainable income continues to grow in importance as investors set out to fund their retirement.

That said, investors are encouraged not to chase yield at any cost. With the average Australian male living to 81.2 years old and female living to 86.6 years old,4 retirees need to ensure their investments not only provide an income but also grow for 20-plus years. We explore how investors can target yield without abandoning the pursuit of capital growth over longer-term investment horizons.

The Corrosive Effects of Inflation

Investors should consider the longer-term impact of inflation, as the value of a dollar today will be worth less in the future, assuming positive inflation. The chart below shows what has happened to the real (i.e. net of inflation) value of $100,000 over the past 20 years due to the effects of inflation. Despite annual inflation averaging 2.56% during this period, the real value of money fell by 40% over the same time frame. Therefore, investors require a return greater than inflation to maintain their purchasing power.

Reality Check – The Sporadic Nature of Bond Returns

While many investors hold bonds in their portfolio to generate income and reduce their exposure to volatile assets, the chart below demonstrates that real bond returns have only been sporadically positive, providing negative returns about 30% of the time over the past 20 years. Specifically, the past three years have seen some large declines in nominal and real terms. To maintain their purchasing power, investors need to look beyond just fixed income.

Taking Stock – Aiming Higher Could Pay Dividends

When seeking to generate income from dividends, an investor has received a reasonable yield of around 4.34% p.a. from Australian equities or 2.35% p.a. from global equities over the past 20 years. However, a more attractive income could have been achieved with a high-dividend-yield equity strategy. This would have increased the dividend income generated to 8.05% p.a. and 5.13% p.a. for Australian and global equities, respectively, over the same 20-year period. Therefore, investors should be selective with equity allocation and incorporate stocks with a greater chance of paying higher dividends.

A Joint Effort – Multi-Asset Yield with Equities, Bonds and Cash

While dividend-income-focused strategies can achieve higher levels of income than bonds, it is also important to note that this comes with elevated levels of volatility vis-à-vis income and total capital return, as equity markets are more volatile. One way to overcome this volatility and generate a high level of income is to combine equity dividend investing with fixed income and cash to provide a less unpredictable and more diversified income profile. The State Street Target Income ETF Model Portfolio shows the result of this combination in the chart below.

Pulling it All Together – A Recipe for Income

This article highlights the importance of targeting income and real returns to help maintain or increase an investor’s purchasing power. The chart below shows that returns of 5.83% p.a. generated by the State Street ETF Target Income Model Portfolio are consistently strong, outstripping cash, fixed income, and, importantly, inflation. While equity returns over the same period have been higher at 9.52%, these returns were almost twice as volatile as the State Street ETF Target Income Portfolio (10.98% vs 6.18%), which also showed smaller drawdowns. Furthermore, the portfolio has provided a better income whilst maintaining or increasing investors’ purchasing power.

Are you looking to implement an income strategy?

Speak to State Street Global Advisors, who can help with your search for yield.

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