Is your retirement income growing?

Is your retirement income growing?

Andy Gracey

Steady income is no guarantee of a comfortable retirement. As you live longer and confront inflation, you will need income growth.

What are the best investments for retirement income? Term deposits, investment grade credit, and high-yield Australian stocks often come to mind. Indeed, these assets may provide stable income for today but they fall short of delivering growing income for the future.

The need for income growth

Why is income growth important for retirement? For one, you are likely to live longer. Australian males born today can expect to live for 80 years, up from 68 years in the early 1970s. And statistically speaking, the older you get, the longer you are likely to live. A 65-year-old man can expect to live another 19 years to 84. Would steady income alone help him avoid outliving his savings?

Secondly, inflation can take its toll. Even moderate inflation can significantly reduce your purchasing power over time. According to the Reserve Bank of Australia’s estimates, a basket of goods and services worth A$100 in 1994 cost around A$170 in 2014. This reflects an average inflation rate of 2.7% a year over 20 years. You will need to grow your income to stay ahead of inflation.

Sources of income growth

Where then can you find income growth? Most bonds produce only a fixed income stream. Bear in mind, too, that sovereign bond yields across major markets remain at historical lows owing to quantitative easing.

By comparison, equities that pay dividends seem more attractive. But not all dividends are the same – they should be sustainable, and they should have the potential to grow.

Why does dividend growth matter? It can be a telling feature of a quality company. To pay and grow dividends sustainably over time, companies need to grow their earnings and free cash flow. Those with the ability to do so tend to have competitive business models, robust balance sheets, a disciplined capital allocation approach, and managements that are aligned with shareholder interests.

But do not confuse dividend growth with a high dividend. A growing dividend can say more about a company’s strength and prospects than a high dividend per se. This is something to note amid the popularity of high-yield stocks in Australia.

As you invest for retirement, don’t overlook income growth. Consider the role that dividend growers can play in your portfolio.


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