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Different ways of taking income

General discussions about equity high-yield income strategies
UnclePhilip
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Different ways of taking income

#417001

Postby UnclePhilip » June 3rd, 2021, 10:27 am

For someone of retirement age looking to take some income from equity investments, there seems to be a continuing debate around whether it is more profitable to follow a 'total return and sell a few when needed' versus 'live off the dividends and/or yield'.

At present we have global index tracking ETFs, from which we can sell off a few to top up our current account, with a couple of years worth of cash as reserve to lessen the danger of needing to sell after market drops.

However, I've been interested to read of those here who buy pooled active investments for the yield they distribute.

Has anyone done research as to the relative merits of these two approaches?

For the avoidance of doubt, I'm not interested in any hot ideological debate; rather in looking at reasonable evidence....

Uncle

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Re: Different ways of taking income

#417009

Postby GrahamPlatt » June 3rd, 2021, 10:46 am

I’d say a mixture of strategies. There will be some yield which you can spend (or re-invest depending on how flush you are at the time), and sometimes you’ll need to sell some (e.g. when a share gets scarily toppy, or when you are managing capital gains, or when you are in need of a particular lump of money for a large outlay). Just go with the flow.

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Re: Different ways of taking income

#417012

Postby bluedonkey » June 3rd, 2021, 10:52 am

I'm not averse to living off total return, just unsure how well it works. I can see how living off dividends plus occasional cash reserves works. How does living off TR work, especially during a turndown? Presumably we're back to cash reserves again. You don't want to sell for living expenses when the market is down.

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Re: Different ways of taking income

#417017

Postby Dod101 » June 3rd, 2021, 11:02 am

I have never been entirely happy about selling off shares or investments of any sort for living expenses for the very obvious reason that I would not like to have been doing that in say March or April last year. I have a mixture of income shares and active pooled investments in the form of investment trusts and live primarily off the income from these.

I also hold some growth shares and ITs which takes care of the capital growth in my portfolio and when, for example, Scottish Mortgage had a particularly good year last year I top it from time to time and usually buy some more income producers. I have also topped Unilever and Astrazeneca at times.

All of that suits me but if you do not feel inclined to get that much involved then concentrate on collective investments only. The over riding factor is what you are happy and feel comfortable with.

Dod

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Re: Different ways of taking income

#417027

Postby Itsallaguess » June 3rd, 2021, 11:32 am

UnclePhilip wrote:
For someone of retirement age looking to take some income from equity investments, there seems to be a continuing debate around whether it is more profitable to follow a 'total return and sell a few when needed' versus 'live off the dividends and/or yield'.


As someone who's followed these types of 'lively debates' over many years, I think it's really interesting to see how you've framed your question, as I think it demonstrates one of the primary underlying issues *with* the whole TR/Income debate...

You've asked 'which is the more profitable', as though to imply that this is where the source of most of the debate issues arise, and I think this is a *very* common misconception, and actually a 'false start' of many of the regular and argumentative debates that surround this subject, where TR-based investors will hold that question up as the basis for an argument that, generally, income-investors would never actually *choose* to start, have, or even try to defend....

As someone who's primarily interested in income-investment (with some level of TR side-line investments, I should add...), I don't even think there's a debate *to be had* in terms of 'profitability', and I would warmly concede that those investors who choose to seek a primarily 'Total Return' approach are likely to come out ahead on that particular 'profitiability' (TR) metric...

But for many, many income-investors 'profitability' is something they're really quite happy to receive 'less of', if by doing so they receive *other tangible benefits* in terms of just how their 'income-based returns' are actually, physically delivered to them, and it's *that* benefit of the income-approach, in my personal opinion, that should dominate this 'TR vs income' question, and not one primarily asking about differences in 'profitability', which I think very few income-investors would ever really try to argue is the main reason for taking such an approach in the first place...

Income investors are generally quite happy to *give up* some level of 'profitability', if it means they can run an income-investment strategy that delivers *other benefits*....

Cheers,

Itsallaguess

Dod101
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Re: Different ways of taking income

#417029

Postby Dod101 » June 3rd, 2021, 11:35 am

Snorvey wrote:I’d say a mixture of strategies.

Agreed. And there are a 2 or 3 tax allowances (the personal allowance, the dividend allowance and the CGT allowance) that make this approach appealing (assuming your not drawing from an ISA etc).


Not sure by your reference to not drawing from your ISA. Maybe just that tax allowances are irrelevant because of course drawing dividends form these are tax free anyway. A wonderful concession to me because I am almost embarrassed these days to be paying very little tax indeed to the extent that the Gift Aid box is hardly ever ticked by me.

Dod

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Re: Different ways of taking income

#417041

Postby 1nvest » June 3rd, 2021, 12:03 pm

Barclays Equity Gilt Study data has a table that shows Equity Income Index adjusted for cost of living within which UK stocks have historically seen prolonged declines of up to peaks of -84% down and more sustained -66% type declines for a sequential series of years.

If dividends dropped two thirds and you were totally reliant upon them for income/spending that's a heavy haircut. Ways that risk might be addressed is to accept that dividend income value could halve or more and accumulate enough such that half of dividends was enough to meet your spending, or to apply a SWR type approach - where the historic worst case withdrawals didn't fail in the sense of potentially drawing down the portfolio value to zero after 30 years, which is a higher income figure than half of dividends.

The safest is having more than enough, where you're only drawing a fraction of dividends or using a low SWR % and when so it doesn't really matter how/where the money is invested as for such large sums even money stuffed under a mattress and drawn/spent as required would tend to be OK (but leave less for heirs). More generally 4% SWR is used as a rule-of-thumb i.e. historically had good prospects of providing a regular inflation adjusted income of 4% of the start date portfolio value and seeing you out (30 years), which in turn provides a indicator of how much needs to be accumulated i.e. 25 times yearly spending, but there is still no guarantee of success. Yet others might opt for inflation bond ladders or annuities. If/when real yields are 2.5% on inflation bonds (index linked gilts), you can load up a ladder of such gilts to provide reliable inflation adjusted income for 30 years for around 21 times yearly spending.

With SWR you just start with 4% (whatever) of the portfolio value being drawn initially for the first year spending, and then at the start of subsequent years you adjust the previous withdrawal amount by inflation as the amount drawn for that years spending, so a regular inflation adjusted income. Taken out of total returns, so could be all covered by dividends/interest or may mean selling some shares. There's no need for a separate cash/reserves pot and could for instance have the money being drawn monthly instead of yearly. With ii for instance their monthly fee of around £10 includes a free trade, so selling some shares each month is in effect a zero additional cost activity.

Evidence wise and the Barclays Equity Gilt Study along with the Trinity Study (SWR) and historic Index Linked Gilt real yields (that the Barclays Equity Gilt Study data includes) should suffice. At least for what did happen (as a indicator of what can happen) - but there's nothing stopping forward time being outside of historical limits.

Personally I see pooled investments as being just another cost, that lines their pockets and adds risk such as still paying relatively high fees when investments are down. I'm more in the liability matched camp, own a home and you don't have to find/pay rent so it doesn't matter if rents soar or collapse. Inflation linked pensions, supplemented with a annuity or index linked type guarantee if needed. And where beyond that the rest can be invested (spend) pretty much however you like.

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Re: Different ways of taking income

#417047

Postby Alaric » June 3rd, 2021, 12:10 pm

Itsallaguess wrote:Income investors are generally quite happy to *give up* some level of 'profitability', if it means they can run an income-investment strategy that delivers *other benefits*....


That's all very well, but when comparing two potential investments it's dangerously misleading to argue that a share with a 6% dividend yield is "better" than a share with a 4% yield in circumstances where the 6% dividend is unlikely to be increased and the 4% one is likely to increase at at least 2% and retain its relative yield as the price increases by at least 2% as well.

Those contributing to the HYP board rarely consider fresh investment in the likes of Diageo or Unilever with a long history of dividend increases but buying prices that reflect that likelihood. On the other hand funds available to retail investors managed with the objective of equity income frequently have top ten holdings containing that pair.

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Re: Different ways of taking income

#417056

Postby Itsallaguess » June 3rd, 2021, 12:46 pm

Alaric wrote:
Itsallaguess wrote:
Income investors are generally quite happy to *give up* some level of 'profitability', if it means they can run an income-investment strategy that delivers *other benefits*....


That's all very well, but when comparing two potential investments it's dangerously misleading to argue that a share with a 6% dividend yield is "better" than a share with a 4% yield in circumstances where the 6% dividend is unlikely to be increased and the 4% one is likely to increase at at least 2% and retain its relative yield as the price increases by at least 2% as well.

Those contributing to the HYP board rarely consider fresh investment in the likes of Diageo or Unilever with a long history of dividend increases but buying prices that reflect that likelihood. On the other hand funds available to retail investors managed with the objective of equity income frequently have top ten holdings containing that pair.


And you're as guilty as anyone for continuing to perpetuate two myths regarding this 'TR vs income' debate, which continues to frustrate those of us who wish they weren't -

1. Income investors are unlikely to be using the word 'better' to mean 'better returns', but to mean 'better investment strategy delivery for *my own* personal preferences'. If I've bought a small mobile phone that fits in my top pocket but has limited functionality compared to larger, more expensive phones, then my phone isn't 'better' at all from a technical sense, but it's certainly better *for me* from a more *functional* point of view. Two uses of the word 'better', that mean completely different things to different people, and that's exactly the case in your own use of the word 'better' here as well, so your very point is completely unhelpful from the get-go....

2. HYP investors are *not* the complete universe of 'income investors' - so in a debate talking about 'income-investing', then why even single a particular group out with straw-man arguments like that?....

Both of your quoted points are, yet again, straw men with regards to this particular debate, and are unhelpful for those of us that would like to clear away misconceptions within it, and not continue to propagate them....

Cheers,

Itsallaguess

Dod101
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Re: Different ways of taking income

#417059

Postby Dod101 » June 3rd, 2021, 1:01 pm

I missed commenting on the 'more profitable' phrase used by the OP.I do not see 'Different ways of taking income' in relation to 'more profitable' or otherwise. I think they are two separate issues. My idea is simply to take the 'natural yield' as income, and try to let the capital do its own thing, preferably increase in value at least in line with inflation.

Dod

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Re: Different ways of taking income

#417095

Postby TUK020 » June 3rd, 2021, 4:03 pm

Alaric wrote:
That's all very well, but when comparing two potential investments it's dangerously misleading to argue that a share with a 6% dividend yield is "better" than a share with a 4% yield in circumstances where the 6% dividend is unlikely to be increased and the 4% one is likely to increase at at least 2% and retain its relative yield as the price increases by at least 2% as well.

Those contributing to the HYP board rarely consider fresh investment in the likes of Diageo or Unilever with a long history of dividend increases but buying prices that reflect that likelihood. On the other hand funds available to retail investors managed with the objective of equity income frequently have top ten holdings containing that pair.


Calm down, this is not the "HYP" Practical board, so we don't need to conform to a particular dogma here.
In the immortal words from the Blues Brothers film: "We play both types of music here - Country AND Western"
:D

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Re: Different ways of taking income

#417122

Postby Alaric » June 3rd, 2021, 5:51 pm

Itsallaguess wrote:1. Income investors are unlikely to be using the word 'better' to mean 'better returns'


Why not? If someone said that savings account A gave a better return than savings account B, why wouldn't they mean higher?

A logical approach for the equity income seeking investor is to set a required level of income. If this can be met from dividends, then reinvest any excess. Otherwise enjoy the capital gains when present and if necessary sell to raise income at the required level, but with the proviso that selling shares to raise income during one of the periodic crashes typical of equities can be dangerous.

If preferences are such that dividend income is preferred to capital gain, what's the exchange rate? £ 100 of gain is equivalent to £ 90 of income, £ 80 or £ nil?

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Re: Different ways of taking income

#417123

Postby Itsallaguess » June 3rd, 2021, 5:57 pm

Alaric wrote:
Itsallaguess wrote:
1. Income investors are unlikely to be using the word 'better' to mean 'better returns'


Why not?

If someone said that savings account A gave a better return than savings account B, why wouldn't they mean higher?


Why not?

I told you why not in the later section of my reply that you've not quoted...

I broke my own rule by engaging with you earlier, so I think that's quite enough for me this year...you fill your boots with your straw-man arguments, that's it from me...

Cheers,

Itsallaguess

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Re: Different ways of taking income

#417169

Postby 1nvest » June 3rd, 2021, 9:25 pm

Natural yield can fluctuate. Adjusting spending in reflection of a fluctuating natural yield could prove awkward. SWR in contrast provides a regular inflation adjusted income.

Noteworthy is that 50/50 US/UK stock since 1900 for all (calendar year granularity) 50 year periods averaged (median) 6.2% annualised real. Applying a 3% SWR to that, 3% of the start date portfolio value thereafter uplifted by inflation, resulted in the remainder portfolio value on average (median again) growing in real terms at 4.9% annualised real - just 1.3% annualised less than the pure accumulators gain!! Basically on average after SWR withdrawals the portfolio value grew ahead of inflation such that as a percentage of the portfolio the SWR value tended to decline over time.

Actually I used a PWR there, a perpetual withdrawal rate, i.e. the worst case 50 years had at least the same inflation adjusted start date portfolio value still remaining at the end. Also noteworthy however is that doesn't mean the portfolio value always remained the same or more in inflation adjusted terms as at times there were sizeable real portfolio value declines during interim periods.

Summing 3% SWR along with on average seeing near 5% annualised real gains, 8% combined, via a simple 50/50 FT All Share/S&P500, along with the reliability/consistency of inflation adjusted income ... is both relatively simple and I suspect might be one of the "more profitable" choices. To add to that I wouldn't bother with rebalancing back to 50/50 yearly and instead would just steer back towards target weightings by drawing income from whichever were the highest valued. Perhaps drawing monthly using 'free' trades.

PS the above is based on the assumption of a 15% US dividend withholding tax having been applied. Some of that might have been 'reclaimed' i.e. used as offset against other payable income tax.

PPS The ride for some could be uncomfortable.
This is US data ($ based, US inflation etc.). Click the inflation adjusted tickbox in the chart and a £1M Jan 2000 start date (a bad time to have started retirement for stock heavy retirement portfolios) value with 3% SWR was down to £300K type portfolio value in inflation adjusted terms at the Feb 2009 lows. Better suited to those who set and forget, those that regularly monitor might perhaps been more inclined to bottle-it (dump, jump ship, at the worst possible time). A partial saving grace might have been that according to FRED data, Jan 2000 £/$ was 1.61 US$ per £, whilst at the end of Feb 2009 it was 1.43, so a benefit in £ investor terms over that period. But still pretty uncomfortable.

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Re: Different ways of taking income

#417177

Postby Hariseldon58 » June 3rd, 2021, 10:03 pm

Rather than looking at this issue from exclusively the Total Return vs Dividend Income, there are practical questions as to how that income is delivered.

I have a portfolio that yields less than 2% and this would roughly meet my spending needs. However only ¼ of that income is delivered in taxable accounts that I do actually spend.

The remainder of the income is in ISA’s and SIPP’s and keeping that income in the tax sheltered accounts makes a lot of sense, selling a similar value of shares in the taxable account.

I could argue that I am following an income approach and spending (roughly) the income from the portfolio but in practice I am selling shares in one part and reinvesting income in another.

I see the issue more of an investing philosophy, on the one hand spend only income derived from the portfolio, protect the capital at all costs and on the opposite side of the debate simply spending within pre set constraints irrespective of the actual portfolio income.

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Re: Different ways of taking income

#417220

Postby Itsallaguess » June 4th, 2021, 6:27 am

Hariseldon58 wrote:
Rather than looking at this issue from exclusively the Total Return vs Dividend Income, there are practical questions as to how that income is delivered.


I'd perhaps argue that beyond the more obvious 'is any likely income actually going to be enough?' question, then your 'how that income is delivered?' one is often the *major* practical question that income-investors often really care about, and is one of the primary 'value offerings' of the income-strategy that they might well employ...

I think that quite often, so long as an income-investor is happy that they're well-diversified, have got a system in place regarding appropriate cash-reserves for any inevitable market-induced 'barren period', and are utilising an income-strategy that broadly delivers on their own particular income-requirements with the minimum of physical market-interaction, then beyond that, I'm really not sure how much 'Total Return' actually features in many income-investors thoughts at all, beyond what might be a simple 'is it doing OK?' question.

Certainly over the years that I've been interested in income-strategies, I can't remember any great focus on 'Total Return' at all from the parties involved, other than when other investors who may choose to deploy alternative strategies choose to poke their heads around the door....

Which leads me again to say that I think the whole 'Total Return vs Dividend Income' question has been consistently framed incorrectly over many, many years, because right from the off-set, that 'Total Return vs Dividend Income' phrase itself seems to suggest that both parties either side of the 'vs' is somehow 'wanting' to be proved some sort of 'winner' in a question specifically framed around 'Total Return', when in actual fact, and as far as I'm aware, absolutely no-one on the 'Dividend Income' side of that phrase is actually arguing, or wanting to argue, that specific case.....

In my view, the whole 'Total Return vs Dividend Income' phrase is a complete red-herring, set up by TR proponents with a view to winning 'an argument' that no-one on the opposite side actually wants to have...

Let's frame it in exercise terms....

Let's have 'Racers' and 'Joggers'....

Racers want to run their race in the fastest time possible - that's their PRIMARY goal from running...

Joggers want to carry out regular, enjoyable exercise only. They aren't interested in speed, or timings - they just want to get out regularly, spend 45 minutes jogging round their routes, and get back home having fulfilled a need for enjoyable exercise...

What would an interested observer think if the Racers kept wanting to have a 'Racers speed vs Joggers speed' debate?

What would an interested observer think if, when the Joggers consistently reminded the Racers that, for them, running wasn't all about 'Speed' at all, but was primarily about carrying out an enjoyable exercise in a way that suits them as individuals, and delivered a regular exercise regime that really helped their physical health over long periods, but when the Joggers kept reminding the Racers of this fact, it was simply ignored, with the 'Racers speed vs Joggers speed' challenge regularly raised again, and again, and again....

An interested observer might suggest that the Racers throwing down their regular 'Racers speed vs Joggers speed' challenge is perhaps framing the whole debate in a way that completely ignores the primary goals of the second 'Joggers' party, and loads the question itself in a way that, of course, the Racers are always likely to 'win'....

But what is there to really 'win', when the Joggers point at the wording of the 'Racers speed vs Joggers speed' challenge itself and consistently remind the Racers that they're never actually likely to want to have that debate, as it completely ignores the needs and deliverables of the particular type of exercise that THEY are choosing to partake in, and which continues to deliver to THEIR actual requirements....

Cheers,

Itsallaguess

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Re: Different ways of taking income

#417267

Postby Alaric » June 4th, 2021, 10:44 am

Itsallaguess wrote:I'm really not sure how much 'Total Return' actually features in many income-investors thoughts at all, beyond what might be a simple 'is it doing OK?' question.


I would have thought Total Return stares in the face of anyone who has a regular report on their total net worth. When that's going down, it's potentially a problem, whether because a dividend yield of 8% was offset by a market price fall of 10% or whether because the sale of 8% of holdings has lead to a 10% fall in value.

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Re: Different ways of taking income

#417272

Postby UnclePhilip » June 4th, 2021, 11:20 am

Oh dear, perhaps it was naive of me to expect a link or two, or a thought or two, on my question, rather than what has actually followed.

When questioned by one particular fund managers' people about our investments' time frame, I realised it was more or less 'eternity'; we're living off them and then pass them on to our children. Because of this, the idea of setting a withdrawal rate intending to run down capital isn't part of the plan; while cherishing of course Mike Tyson's "Everyone has a plan until they are punched in the mouth".

Hence the reasonable inquiry as to the rival merits of "total return while selling enough to live" versus "dividend yield while leaving capital alone". I fully understand the need to base strategy on each individual's temperament and goals; another nice quote is "equities help you eat, bonds help you sleep".

However, based on (i) an eternity portfolio and (ii) a disinterest in whether money drawn down qualifies as 'capital' or 'dividend', it's quite reasonable to look for any reliable evidence as to what these two approaches would have done with regard to net wealth and income.

Nothing to do with scoring points, just looking at past performance and taking a view with regard to probability, risk and human nature.

But I'll leave it there, for this site....

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Re: Different ways of taking income

#417277

Postby Dod101 » June 4th, 2021, 11:35 am

Hariseldon58 wrote:Rather than looking at this issue from exclusively the Total Return vs Dividend Income, there are practical questions as to how that income is delivered.

I have a portfolio that yields less than 2% and this would roughly meet my spending needs. However only ¼ of that income is delivered in taxable accounts that I do actually spend.

The remainder of the income is in ISA’s and SIPP’s and keeping that income in the tax sheltered accounts makes a lot of sense, selling a similar value of shares in the taxable account.

I could argue that I am following an income approach and spending (roughly) the income from the portfolio but in practice I am selling shares in one part and reinvesting income in another.

I see the issue more of an investing philosophy, on the one hand spend only income derived from the portfolio, protect the capital at all costs and on the opposite side of the debate simply spending within pre set constraints irrespective of the actual portfolio income.


That sounds good in theory but unless you are buying inside an ISA or a SIPP the same shares that you are selling outside of it you are going to end up with an unbalanced portfolio. After investing in ISAs and their predecessors for more than 30 years I now have most of my assets in ISAs or my SIPP anyway. I still have a decent proportion outside, held in certificates, mostly low yielders and if I have to pay a little tax I do not mind. I do not think I will be putting much more into an ISA. I have two largish ISAs with two different platforms and also the certificated shares. That suits me from the point of view of security as well as tax on the dividends, and the dividends just roll in. I do look at total return though and anyone not doing so could easily end up with the likes of the tobacco shares, which have been a bit of a disaster on a total return basis for the last few years.

The OP's 'Oh dear' presumably reflects the long rambling nature of this sort of thread. Having now just added to it I apologise, but am primarily responding to Hariseldon

Dod

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Re: Different ways of taking income

#417282

Postby NotSure » June 4th, 2021, 11:51 am

UnclePhilip wrote:
Nothing to do with scoring points, just looking at past performance and taking a view with regard to probability, risk and human nature.



This is something I have looked at - I am accumulating at this point, but if I can achieve a better total return via re-investing income producing stock, then I would try to do so. Plus, I am 'practising' for when I retire to try to decide whether to use drawdown or annuity. If drawdown, then what approach should I adopt.

A couple of articles on this linked below, but from what I read, the consensus is that when in retirement using a TR approach rather than purely focussing on income has been much more successful since about 2008, coincidentally or otherwise the advent of the QE experiment.

There seem to several reasons for this - focus on income reduces diversification since e.g. tech stock do not tend to pay out much so are generally avoided by income seeking investors. There are tax implications. To summarise:

A 2016 study by Vanguard Research identified the following four key advantages: better diversification, more control over portfolio withdrawals, better tax efficiency and the potential of increasing a portfolio’s longevity(6).


https://cipinvest.com/investment-perspective-blog/2020/1/21/constructing-retirement-portfolios-the-income-versus-the-total-return-approach

https://illuminate.nucleusfinancial.com/blog/income-vs-total-return-debate-retirement

As is usual in these things, I fall into neither the 'purist' TR or income camps, and am experimenting with a blend of growth in the hope of accumulating, plus income, also in the hope of accumulating more steadily, but I also feel income shares can be 'defensive'. The main argument against 'pure' income in my mind is the reduced sector diversification it enforces.


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