Why the old approach to income investing won’t work anymore

Why the old approach to income investing won’t work anymore

Shane Oliver

When it comes to income investing, the received wisdom has usually put term deposits at the centre of the discussion.

They still are now, but for a very different reason – with interest rates at record lows and potentially set to fall further, it’s become increasingly difficult for those relying on deposits for income.

As AMP Capital’s Shane Oliver explains in a new update: “The environment of low interest rates is challenging for those relying on investment income to fund their living costs and investing for income can seem daunting.”

Oliver goes on to compare the income yield of different investments, including one-year term deposits (about 1.3%), residential property (about 2.2% for apartments and 0.8% for houses, adjusted for costs) and Australian shares (up to 5.6% when franking credits are allowed for).

Describing the yield on bank deposits and government bonds as “woeful,” Oliver makes the case for alternative approaches to income investing – including shares, property and infrastructure – and justifies them based on historical yields as well.

Of course, as with most investments – outside of bank deposits, which would only fail in the extremely unlikely event of the bank defaulting on them – there is a level of risk income investors take on, and there is always the potential for so-called “value traps”.

But this is where it’s important to consider all variables available and actively pursue new approaches to generating income in a portfolio, because interest rates are likely to stay low for some time.

So, with traditional ideas around income investing losing steam in this new climate, it’s the perfect time to learn more about how to shore up income portfolios for clients. Next week, on November 7, AMP Capital is hosting a webinar with Dermot Ryan and Tom Young, Co-Portfolio Managers, Income, on, Generating income in a low interest rate environment. You can join here.

While every care has been taken in the preparation of this document, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) makes no representation or warranty as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This document has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this document, and seek professional advice, having regard to the investor’s objectives, financial situation and needs.

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