Getting income investing right
Written and accurate as at: Feb 03, 2016 Current Stats & Facts
Video
Video: Morningstar's Christine St Anne and David Simon
Video Transcript
Christine St Anne: With market volatility income is increasingly seen as the only positive return for investors, but there is more to investing. Today, I'm joined by Westpac's David Simon to tell us about getting income investing right.
David, welcome.
David Simon: Thanks Christine.
St Anne: David, with this market volatility, is investment returns all about just income?
Simon: Yeah. Look it's easier to fall in that trap and certainly whilst volatility is really high, share market performance tends to be very low. It underperforms. When volatility is quite low, the share markets tend to rise. So, when people who are investors are looking for returns, when they can't get them through growth, they are looking for income.
So, it's quite natural for them to seek an income-based asset. However, unfortunately, there are a lot of risks associated with this. So, I wouldn't say income investments are the right ones to use in volatile markets, but what I would say is that investors should always practice the discipline of being really well diversified. Have a combination of both income-based assets as well as those growth-based assets as well.
St Anne: Can income protect against inflation?
Simon: Yeah. Look, that's a really interesting one. In general, no. So, in general, income investments on their own, it's really difficult to protect against inflation, certainly once you've taken into consideration tax. So, once you look at tax and inflation and just an income-bearing asset such as a bank deposit or a fixed interest instrument, really difficult to protect against inflation and that's why it's really important to have a combination of income assets as well as growth assets. And indeed over time the growth assets should they be of quality characteristics should appreciate in value over a period of time whilst the income component of the diversified portfolio is really delivering the income return.
St Anne: David, you mentioned growth assets. So, what sort of investments can investors look at to get that growth?
Simon: Look, there are a combination and a variety of different assets that investors can look at when they are looking for growth. There is the traditional staples of shares and property, but there are alternatives as well. Investors can look at other assets to appreciate the capital value and look for capital growth; some such as foreign currency, commodities including gold are some of the examples of assets that have the ability to appreciating capital value and obviously, generate and deliver growth to investors. When coupled with their income style portfolio, hopefully that can also protect against inflation as well as those deliver a return beyond that.
St Anne: David, you mentioned tax. Are there tax considerations for investors to think about when investing in income?
Simon: Yeah. Look, if you're investing in just income assets on their own such as cash and fixed income, for instance, they are really taxing. So, they are fully taxed at a marginal rate or whatever rate the entity that owns the asset is paying.
There are other assets that also generate income that can provide some respite. For example, Australian shares are a great example of assets that can deliver an income and also provide some concessions to the underlying investor. So, if that Australian share that the investors are holding is fully franked then that tends to mean that the company tax rate of 30% is already paid by that company and they then pass that credit on to the underlying investor.
Other assets that provide some respite on tax include some types of property through depreciation and expenses to run that property. It sometimes comes to the investor as a tax deferral and that basically means the underlying investor isn't paying the marginal tax rate on the income they receive for the entire amount as some of it is actually reducing the cost base that the investor would ultimately pay through a capital gains tax play which actually would better off the investor - the investor would be better off by that outcome.
St Anne: David, thanks so much for your insights today.