How CG Wealth Management’s new CIO sees income fitting in client portfolios
Finding quality income for the long-term
Fawcett emphasizes the importance of income strategies that can help smooth returns for clients. That includes bonds and their negative correlation to equities in periods of low or controlled inflation. Even in today’s higher inflation environment, Fawcett notes that bonds can stabilize performance. That stability from income-paying assets is key, he argues, because many clients now face the prospect of 30-year retirements. The simple fact of inflation mandates some exposure to more growth-oriented equities for most clients. Stabilization is absolutely necessary to keep those older clients exposed to growth.
A useful way to provide both income and equity exposure is through a selection of dividend stocks. While dividend strategies are remarkably popular, especially among Canadian investors, Fawcett cautions against seeking the highest dividends on the market. He looks for sustainable yields, typically between 4 and 5 per cent, which imply that a company can still reinvest enough to grow earnings, which should lead to dividend growth. It’s that combination which he sees powering serious compounding over time. Higher dividend yields can be unsustainable and lead to a drop-off in earnings growth.
Options strategies have become remarkably popular among Canadian investors as a whole, with some covered call option ETFs boasting double-digit income yields. Fawcett is broadly cautious about those strategies because of their inherent growth trade-offs. He says they can be used tactically in certain client situations, but that those are specific and the covered call fund wouldn’t be fundamental to that client’s overall income strategy.
Of course, advisors can also now generate income from client portfolios through simple decumulation formulas. Portfolio management technology has made that process, which used to be quite complex, very easy to execute. However, Fawcett notes that certain clients prefer the comfort of a dividend rather than income from asset liquidation.
Communicating the complexity of modern income
While income can be a psychologically stabilizing force for investors, modern income strategies are deeply nuanced and complex. They contrast with past generations’ wider pension access, which far more closely resembled the employment income they once knew. That complexity is all the more acute for high net worth and ultra high net worth clients, who often need to manage significant tax burdens in their income strategies.
