Investing well is about knowing the right investment principles and then ensuring you apply them in a disciplined fashion. One such principle is the need to invest in assets that provide a ‘growing income stream’.
What do I mean by this? Most investments have an income stream of some sort. In the case of a property investment the income is rent, for shares it is the dividends and for government bonds it is the coupon payments that the investor receives.
Imagine for a moment you are a 60 year old who plans to retire this year. We know from history that the cost of living rises each year, on average about 3% per annum, albeit this can vary dramatically between countries and over certain time periods. Therefore if you lived another 30 years you could expect the cost of living to triple over this time.
The logical conclusion from this is you need to invest in assets that provide you with a growing income stream, that is assets where the income rises each year. Importantly this income stream must rise at a rate equal to or greater than inflation. If inflation is at 2% and the cost of living is rising by 3% then the purchasing power of your money is declining.
There is a simple solution. When constructing your investment portfolio select investments where the dividends or the rent rise each year at a rate that is ideally greater than inflation.
Let’s look at an example. I have selected a company called ‘Woolworths’ which is Australia’s largest supermarket provider. The company is listed on the Australian Stock Exchange so we can accurately attain information on the income stream that Woolworths has provided to its shareholders.
WOOLWORTHS
The table below shows the income stream that Woolworths has provided its shareholders from 2004 – 2013. The middle column shows the dividend per share (DPS) which represents the income you would have received for each share you own in Woolworths. The column on the right shows the growth in the income stream from year to year.
|
Year |
Dividend PA (cents) | Growth |
| 2004 | 45 | |
|
2005 |
48 | 7% |
| 2006 | 59 |
23% |
|
2007 |
74 |
25% |
| 2008 | 92 |
24% |
|
2009 |
104 | 13% |
| 2010 | 115 |
11% |
| 2011 | 122 |
6% |
|
2012 |
126 |
3% |
|
2013 |
133 |
6% |
|
$9.18 (918 cents) |
13% pa |
As the table illustrates a Woolworths shareholder would have received 918 cents ($9.18) per share over the 10 year period, representing an annual growth rate of 13%. A stellar result when you consider inflation over that time would have been somewhere in the 3% range.
DIVIDEND INCOME
Let’s illustrate this further by assuming you owned 7600 Woolworth shares. The table below shows the income you would have received in dollar terms each year as the dividends increased.
As you can see from 2004 to 2013 your income stream nearly tripled in just 10 years, from $3,420 per annum to $10,108 per annum.
| Year | Share Price | No. of Shares/Units | Dividend Income | Share Value |
| 2004 | $13.16 | 7600.00 | $3,420.00 | $100,000 |
| 2005 | $15.77 | 7600.00 | $3,648.00 | $119,852.00 |
| 2006 | $19.73 | 7600.00 | $4,484.00 | $149,948.00 |
| 2007 | $29.82 | 7600.00 | $5,624.00 | $226,632.00 |
| 2008 | $27.78 | 7600.00 | $6,992.00 | $211,128.00 |
| 2009 | $29.00 | 7600.00 | $7,904.00 | $220,400.00 |
| 2010 | $29.23 | 7600.00 | $8,740.00 | $222,148.00 |
| 2011 | $24.79 | 7600.00 | $9,272.00 | $188,404.00 |
| 2012 | $28.88 | 7600.00 | $9,576.00 | $219,488.00 |
| 2013 | $34.96 | 7600.00 | $10,108.00 | $265,696.00 |
This healthy looking graph illustrates those same dividends as a bar graph. A nice strong uptrend.
It is important to note that as great a result as Woolworths achieved over this time period, no one company is likely to sustain these growth rates consistently. The point I am trying to illustrate is that you want to invest in assets where the income is increasing at a rate equal to but ideally greater than inflation, that is assets that give you a growing income stream.