Planning for income and capital growth in 2014 and beyond

The current investment environment, characterised by economic uncertainty and volatile markets, coupled with a choice of over 1 000 unit trusts and a myriad of different products, has made the simple act of investing a difficult and often stressful endeavour. An exclusive focus on capital growth has further complicated this process. To simplify investment decision making, Marriott recommends that investors adopt an income focused approach.

It is important for investors to recognise that the major drivers of return relate to the income characteristics of an investment: Income yield and income growth.

• Income yield – The majority of investments produce income such as dividends or interest. Reinvesting this income allows for the accumulation of more income producing capital. Consequently, the process of reinvesting income can be a major contributor to return over time. Bonds and cash are typically high yielding asset classes.

• Income growth – Income growth from an investment is the primary driver of capital value growth over time. This is evident when looking at the dividend and price history of Mr Price in the chart below. Consequently, growth in income can also be a major contributor to return over time. Equities produce the highest level of income growth; however, the trade-off is that this asset class offers investors a relatively low income yield.

Income growth (p.a) 26%
Price growth (p.a) 27%

Re-investing the income from high yielding asset classes is the most predictable way of generating an investment return as the income yield is known upfront so the rate of capital accumulation is predetermined. The return from asset classes which generate income/capital growth has the potential to be higher; however, the outcome will be less certain. This is particularly relevant in the current economic environment.

Recent GDP data released by Stats SA revealed that the South African economy contracted in the first quarter of 2014 and some economists are warning of a potential recession due to on-going industrial action. In such an environment the income growth prospects of South African companies may diverge considerably. It is therefore critical for investors to be selective with regard to their choice of domestic equities.

Marriott is of the view that equity investors looking for predictable inflation beating returns will be best served over the next 5 years by investing in companies that produce basic necessities or offer value to consumers. These companies have track records demonstrating an ability to grow their profits and dividends irrespective of interest rate or business cycles significantly reducing the likelihood of an unsatisfactory outcome.

In summary, knowing the income yield and having a reasonable expectation of the likely income growth from an investment portfolio will significantly reduce the complexity and unpredictability associated with investing. For more information on an income focused investment plan, which will provide investors with this information, visit Marriott’s website (www.marriott.co.za) and try Marriott’s simple and intuitive Investment Planning Tool.