Income yield is the wrong thing to focus on when it comes to understanding the level of income retirees receive from an invested pension pot. It is dividend income that matters.
We have all seen press articles purporting to be authoritative and discussing income yield as if this is what retirees can pay their bills with. It isn’t. Little wonder then that many advisers – and, dare we say it, even some support people within fund groups – misunderstand the difference between income yield and the real lived experiences of retired clients who receive dividend income.
Retirees cannot pay their bills using income yield, but they can pay them using dividend income. The following chart illustrates the difference between income paid as dividends per share (or unit) and income yield using data from one of our Retirement Income Champions.
As discussed in our white paper, Retirement income champions and the safe withdrawal rate, these are a small group of open-ended multi-asset income funds where the investment process is specifically engineered with the aim of delivering a naturally occurring, base-line level of income throughout the accounting year and then seeking to grow the total of income paid to investors every year to help offset the effect of inflation. We have identified four so far and our search continues.
“Many advisers misunderstand the difference between income yield and the real lived experiences of retired clients who receive dividend income.
Source: BNY. BNY Mellon Multi Asset Income Fund’s total dividends paid in pence per share versus its historic income yield in the fund’s accounting years 2015/16 to 2024/25. The accounting year end is 30 June.
As the chart shows, income yield and dividend income paid are not the same thing. Dividend income is declared on a per-share or per-unit basis and therefore the number of shares or units you own determines how much income you receive – for example a dividend of 5p per share.
Any fluctuations in the share price – and therefore the total value of the shares you own – makes no difference to the income you receive. It is the number of shares you own and the dividend per share that matters. Income yield is different – although not completely unconnected to dividend income.
Income yield is calculated by looking at the total of dividends per share received over the past year and dividing it by the current share price – in this case the price for an individual share in a multi-asset income fund in our Retirement Income Champions cohort.
If the price per share in the fund has fallen by a reasonable amount over the course of the year – that is to say, the fund’s value has fallen – then its income yield is likely to go up; and if the fund’s value has increased by a reasonable amount, then its income yield is likely to fall.
We have seen some resources used by advisers that show how stable or otherwise a multi-asset income fund’s income yield has been. Let’s be clear, though – this does not necessarily tell you how stable the level of income received by a retired client has actually been or is likely to be. Unlike income yield, the dividend income received by a client does not fluctuate with the value of the fund.
To understand what income a retired client has received from a multi-asset income fund, advisers need to know two things:
* The number of shares the client owns in the multi-asset income fund
multiplied by
* The total dividends per share the fund has paid during the period under review.
The income yield – which is expressed as a percentage – is of no consequence unless you want to compare it with what might have been available to invest in elsewhere.
Paul Ilott is managing director of Scopic Research. This is an edited extract from the firm’s white paper, Retirement income champions and the safe withdrawal rate. It is available for advisers to download for free from The Adviser Toolkit page on the Scopic Research website
Have we been looking at investment risk in the wrong way?
The appropriate combination of equity-type risk and bond-type risk to successfully execute a ‘Retirement income champion’ strategy appears to be between 40% and 60% – either in favour of bond-type risk that provides stability of income, or in favour of equity type risk that offers the potential for growing income.
This has important implications for risk profiling, given multi-asset income funds with volatility risk profiles that differ significantly from this equilibrium might jeopardise the ability to generate a sustainable and rising income stream. Taking too little or too much volatility risk might not work.
Risk-rating agencies have to date largely focused on providing ratings by categorising the investments held within multi-asset funds into asset classes and sub-asset classes and using the past covariances of returns between them and their forecasted returns to arrive at an overall expected level of volatility.
The risk rating is based upon the expected level of volatility of the multi-asset fund’s total return – in other words, it takes no account of the ‘risk’ to the income stream that it might generate. Arguably, though, it is the risk to the income stream that advisers and their retired clients are likely to be most concerned about.
