Peter Westaway, head of Vanguard’s investment strategy group in Europe, says: “One needs to be very careful not to lose sight of the fact that the most important property of any investment is its total return and simply skewing your focus towards those investments that generate a particular return, rather than a split between capital gain and income, you may end up giving up overall return.
“Investors should be careful not to be obsessed with income at the expense of overall return.”
That said, he points out that one of the advantages of using ETFs and passive vehicles to build an income portfolio is the normally lower costs involved. In particular he points to research that suggests funds with lower charges tend to perform better on average than those with higher charges, as by charging higher fees, even the so-called ‘star’ active managers handicap themselves when it comes to outperforming.
Mr Westaway adds: “That’s the beauty of the passive approach. You’re not having to pay a star fund manager, there is typically lower transaction costs with a passive fund, and so all of those things tend to lessen the overall cost drag that will be associated with it. That is a very good place to start.”
Nyree Stewart is features editor at Investment Adviser
Expert view
Andrew Walsh, head of UBS ETF sales, UK and Ireland
Investments which deliver strong income can offer investors an interesting mix of potential returns and stability. In particular, this applies to equities delivering high dividend yields. This is due to the fact that while prices in the equity market can often fluctuate quite strongly, dividend payments mostly remain relatively stable – even during bear markets. The significance of dividends is correspondingly large for long-term investment success.
ETFs offer investors an intelligent and efficient access to dividend strategies, be it via an ETF tracking the Dow Jones Global Select Dividend index or via an ETF which specifically invests in defensive sectors of the economy.
An important aspect to consider when investing to access income in the equity space is, of course, the impact of dividend compounding. If one was to look at the price return (excluding dividends) of the MSCI World index from 1975 to 2014, the index returned approximately 18x over that period. If one includes the dividends paid out by the MSCI World and reinvested those back into the index consistently, the total return over that period would have been roughly 39x.
However, things get very interesting when choosing a high dividend yielding global index and coupling that with the effect of dividend compounding, using as an example the MSCI World High Dividend Yield net total return index. From 1975 to 2014, that index has delivered total returns of 70x, due to the positive impact of combining a high-yield equity-screening process with the positive impact of dividend compounding.
