For many of our clients, prioritising income in their portfolios is essential. The sense of comfort derived from a steady stream of portfolio income often outweighs the reliance on portfolio appreciation alone.

While portfolio appreciation (capital growth) is essential for building wealth, it is unpredictable and volatile. Stock prices fluctuate daily due to market conditions, geopolitical events and economic factors. This volatility can lead to stress, especially for retirees or those nearing retirement, as market downturns might force the sale of assets at unfavourable times.

On the other hand, portfolio income offers predictability and consistency. Dividends, interest payments, and rental income provide cash flow that covers expenses without liquidating investments, thereby helping to reduce stress during market volatility.

Examples include:

• Dividends: Regular payouts from established companies, often from the Australian Stock Exchange.
• Fixed Interest: Predictable payments from bonds, capital notes, private credit or secured first mortgages.
• Real Estate Income: Rental properties generating cash flow from tenants.

While capital growth typically occurs over the long term, it remains less predictable and tied to economic cycles. As such, the stability provided through portfolio income helps investors stay focused on their goals.

A common guideline is the 4-5% income rule, which assesses a portfolio’s ability to generate enough income in retirement so that capital isn’t required to fund expenses. For example, if a client requires $200,000 per annum in retirement, the portfolio should have invested assets of $4,000,000 (at 5% income return) to $5,000,000 (at 4% income return) to meet this requirement without relying on capital. Tax implications must also be considered.

While income-focused investments provide stability, diversification remains the key to long term success in a portfolio. This will involve maintaining exposure to growth assets, such as international shares. Although these assets are less focused on income, they play an integral role within the portfolio by countering inflation. Ultimately, it’s important to have a strategy that’s tailored to your individual circumstances and needs, incorporating both income and growth objectives.

Portfolio income provides financial security and peace of mind. By generating a steady income stream, you can reduce anxiety, avoid impulsive decisions, and ride out any market conditions with a degree of comfort and certainty. Whether for retirement or general stability, prioritising income in your portfolio is a powerful strategy for achieving long-term well-being.