Investors in search of equity income find themselves in strange territory. Just how strange didn’t dawn on me until I totted up the income that the Bearbull Income Portfolio will distribute for the year just about to end. For the first time since the fund was launched in late 1998, its distribution will generate a yield less than the annual rate of UK inflation.
Not just less than but, assuming the inflation data for 2022 stays pretty much where it was in November, the yield on the Bearbull portfolio will be less than half the inflation rate – 4.3 per cent compared with an average inflation rate of 9 per cent this year. To put that into context, on average for each of its 23 years of full data, the income portfolio’s yield has been 2.6 times the annual inflation rate.
These observations need a qualification – if the yield is sustained more by the falling value of a portfolio’s capital than by the rising quantity of dividends received, then it is compromised anyway. In those years – 2019 was one such for the Bearbull portfolio – some income should be reinvested into the portfolio rather than distributed. That way, the real value of the portfolio’s capital will be protected, thus safeguarding the its ability to generate real growth in income in the future.