Investing for Income
People invest their savings for a wide variety of reasons: a house purchase, contingencies, vacations, children's schooling, plus retirement. Then there are those who invest to provide an income for their families and themselves. Conventional thinking has long suggested that bonds and other "fixed income" securities be the source of such income. This can work well if interest rates are stable and there is no inflation.
An awkward aspect of bond investment for income is the reinvestment risk, that is what the interest rate will be when the bond comes due. Since 1982, Canadian 10 year government yields have fallen from 16% to 1.15%. Suppose you had a million dollars to provide income. In 1982, you would have received over $150,000 but today only $11,500; a rather sharp decline. The reality is that the price of income has grown enormously.
Another way to gain income from capital is to invest in organizations where there is a likelihood of increasing payments to owners. No strategy is riskless but a prudently selected portfolio of dividend paying shares in companies in stable and growing businesses can provide solid income gains over time.
The accompanying chart shows the yields for 10 year Government of Canada bonds and shares of the Royal Bank with the data coming from the Bank of Canada and ThomsonReuters. As well, it is important to note that the dividend paid by the Royal Bank increased eight times during the time frame cited. There certainly have been other companies which have raised their dividends consistently.
In respect of investing for income, it is worthwhile to remember the words of Benjamin Graham writing in The Intelligent Investor:
Basically, price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies.