Video: Income from Total Returns

Low bond yields have caused concern for those needing a stream of income from their investment portfolio. There is another, more holistic, option that was discussed by Vanguard's Chuck Riley in a live webinar from which the following short video was taken.

Here is the video transcript:

Moderator: ”Just how does total return investing apply in today’s near-zero interest/ return in fixed income investments? Won’t a sudden increase in investment rates be disastrous for those of us on a fixed income?”

Chuck, that’s a great question. It’s probably one you get a fair amount in your job.

Chuck Riley: Yeah, yeah. I give advice to Vanguard clients and shareholders, and certainly the hot topic of conversation the last few years has been the low-interest-rate environment. And the great thing is, is that total return applies in a low-interest-rate environment, in a higher-interest-rate environment, because if you just focused on income, in this environment it’s very difficult to find enough income to be able to maybe meet a spending need that you have. So you really do need to rely on the capital appreciation of a portfolio and certainly over the last few years we’ve seen the stock market appreciate. And that’s been helping clients be able to have the money that they need to spend.

But I think that total return is a nuance that investors struggle with. They think of “I need income in retirement to live on. I don’t want to touch my principal, so I just need something in my portfolio that’s going to throw off a certain level of interest or dividends. I want high dividend-paying stock—”

Moderator: Something that’s going to show up in my bank account.

Chuck Riley: That’s right, exactly. And there are environments when that’s going to work. I mean hopefully if we return to a more “normal” environment, we’ll get back to that. Where you really—total return and income can be the same if the income that you get from your portfolio in a taxable account is equal to what you spend. There is no difference.

But because of this low-interest-rate environment, it’s much tougher to do. We see investors maybe making some not great choices, you know, chasing higher-yielding, higher- risk type of investments; and so it really does apply in this low-interest-rate environment. And the great news is that when there are higher interest rates—sure, we’ve got to go through this transition where bond values will fluctuate—but, ultimately, we’ll have higher income.

I tell my clients all the time, higher interest rates is actually a good thing. If you’re looking for income, you know, let’s get away from these, the two and a half percent yield on the ten-year Treasury. Let’s get back to a more normal environment.

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