What is the outlook for retirement income in 2025? Premier Miton Cautious Monthly Income Fund Manager David Jane discusses whether the Mag 7 could be income plays, the Asia Pacific, the UK and bonds.
At this time of year, investors are encouraged to write an outlook for the forthcoming year. But most experienced investors realise that they can have very little knowledge of the future. This outlook comes from a different angle. This is an outlook for income, and a strategy based on drawing income for expenditure or reinvesting income to compound growth is much more predictable and reliable than one that is based on predicting volatile markets.
Mag 7 as 2025 income plays?
It might seem odd to open a note on retirement income about a group of companies that pay little in the way of dividends, but these big-cap tech stocks have been a huge driver of returns over the past year. It is, therefore, unwise to dismiss them in the absence of a compelling reason to sell. Investment in these and other growth stocks can provide capital gains that may be reinvested to generate income growth. Ultimately, it is very hard to grow the income in a fund if the capital is not also growing – the two go hand in hand.
The same can be said for companies that fit a US reshoring theme, where many continue to see significant revenue growth and share price appreciation, but with little in the way of income. Returns from these can be reinvested elsewhere. Also in the States, we have a significant exposure to US banks. Many do have reasonable starting yields and strong dividend growth.
Great Income from Asia Pacific
With so much focus on the US, investors have been ignoring some great price action in other parts of the equity market. The Asia Pacific region has seen plenty of positive momentum of late. The recent recovery in Hong Kong and China has been on the back of government intervention and Korea’s ‘value-up’ program. In both cases, it is in the national interest to make equities a more attractive proposition to both domestic and international investors. Similar efforts had some success in Japan in the past. For income investors, this is a good opportunity. Historically, these markets have shown good yields but with little share price momentum. Combining the two suggests attractive returns.
Pivot to the UK?
The UK equity market has historically been very heavy in consistent income stalwarts, though this record has been somewhat tarnished in recent years. Now the political outlook is clearer, we have increased our exposure, particularly in domestic focused companies, such as retail and homebuilders.
For the bigger dividend-paying industries, such as the banks and energy companies, we tend to take a more global approach, rather than concentrating on the small number of UK stocks.
Continental Europe also has some good, if somewhat unreliable, dividend-paying companies, although outside the banks these tend to be heavy industrials or automakers. These areas are very much challenged at present and hence we are avoiding.
Bonds have lots of yield, but capital risk remains
The end of the lower for longer era means that bonds are again an attractive asset for income. This should always have been their role, but an extended period of falling yields meant investors became accustomed to receiving capital gain on their bond portfolios. Whilst yields have been rising, we have been keeping our bonds very short duration and reinvesting maturities at the increased yields now available. Unfortunately, the expectation of falling short term interest rates has led to the situation where the shorter end is also where the lowest yields are available.
The recent increase in bond yields, whilst it has hurt capital values, particularly for longer dated bonds, has thrown up the opportunity to invest at higher returns going forward, even at the shorter end. Indeed, high quality corporates are now available at yields in excess of 6% at all maturities, an attractive real return even assuming a higher for longer environment. The challenge remains to insulate portfolios from further potential rises in government yields, should rates at the longer end continue their rise. Therefore, we anticipate an ongoing strategy of holding a short duration portfolio.