Investing for Income via Higher Yielding Shares

I’d like to welcome back John Hulton.  John claims to not be a financial guru, stockbroker or financial journalist, but just an average bloke who has managed to find a way through the minefields of personal finance and develop a system that works for him and, which could be helpful for other people.  He has already retired from full time work which puts him at the end game of what this Site is about – Save Hard, Invest Wisely, Retire Early.  The fact that he did this at 55 means his Save Hard, Invest Wisely element worked for him.  So while John is not a financial expert his approach has given him what many of us are chasing.  I hope you again enjoy his thoughts.

There’s no getting away from the fact that the past 4 or 5 years have been tough for savers and pensioners.  The Bank of England has kept interest rates at a record low 0.5% for the fourth consecutive year.  Annuity rates are equally at an all time low and there appears little reason to think there will be any significant change for the foreseeable future.

According to a recent study by Prudential, people retiring this year will have a typical yearly income of £15,300, around £3,400 less than those who retired in 2008.  In a separate report by Moneyfacts, they found that annuity income fell by 11.5% in 2012, the biggest annual fall since 1998.

Understandably, many savers are looking for alternatives which can provide a better return than the 2% or so on offer from their bank or building society.  Likewise, people approaching retirement are investigating alternatives to the rock-bottom annuity rates currently on offer.

One way to maximise income is to invest in a diverse portfolio of large, well-run companies which will grow their earnings and profits for the decades ahead.  Companies which have weathered the storm over the past 5 years and have also managed to maintain a steady stream of rising dividends are likely to continue doing this in the future.

In my ebook Slow & Steady Steps from Debt to Wealth I set out a step-by-step guide to generating income from the stockmarket.  I have found, through a process of trial and error over several years that a combination of individual higher yield shares together with a portfolio of investment trusts gets the job done for me.

In a post earlier this month I outlined some of the benefits of investment trusts and in this second part, I will cover my higher-yield shares portfolio.

For me, the main advantage of holding individual shares is lower ongoing costs - after the initial purchase, which could be as low as £1.50 plus 0.5% stamp duty, there are no further costs involved in holding the portfolio.  I suppose if you are in the build phase and reinvesting dividends from time to time in more shares, there will be some further minor cost but basically, once you have purchased your 15 or 20 shares that’s it.  With investment trusts there are the same initial costs to purchase PLUS the trusts annual expenses and management fees - usually between 0.5% and 1% (plus any performance fee).