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Income investing – be prepared to invest for longer in 2020

22 December 2019

As 2020 approaches, Schroders said investors should be prepared to invest for longer and diversify their investments to boost their income. 

According to the asset manager’s Outlook 2020 series, an environment of low interest rates is likely to persist over the coming 12 months, limiting the income on offer from safe assets like cash and government bonds, with Schroders forecasting a further interest rate cut in the US during 2020.

In developed markets in particular, rates of inflation are higher than deposit rates meaning the value of cash savings is actually being eroded.

High expectations

Rupert Rucker, head of income solutions, Schroders, says investors’ expectations are over-optimistic, after its latest investor study found that average expectations of annual investment returns over the next five years stands at 10.7%.

He says: “These expectations far outstrip the savings rates offered by banks. But even higher risk, and potentially higher return, asset classes like shares don’t offer these kinds of returns.”

Schroders’ latest forecast for the next ten years show emerging market equities are likely to provide the highest returns of 9%, but this is still below the average returns investors expect.

But Rucker says there are steps investors can take to achieve higher returns than those offered by savings accounts or government bonds.

According to Rucker, education is key – higher returns carry higher levels of risk and it’s important for income seekers to be aware that they are risking capital when investing in asset classes like corporate bonds or shares.

Investors should also take a longer-term view, with a time frame of at least five years, particularly when investing in higher risk assets such as shares.

Lastly, Rucker recommends investing as soon as possible, allowing the investments to grow through the power of compounding.

He says: “Looking more specifically into 2020, the dividend yield on most equity markets appears to be at attractive levels currently. Equity investment may be suitable for those seeking income who are prepared to take extra risk with their capital.

“Current dividend yields look attractive compared to recent history and in particular, dividend yield levels are highest in Europe and Asia and at much higher levels than US markets. Savers may need to consider many more sources of income than in the past, including equities. Dividends contribute a higher percentage of the total returns from equity markets in Europe and Asia so as we look into 2020 this could be a good opportunity to do some research.”

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