Is It the Time to Rethink on Income Portfolios Amidst the Pandemic Induced Rout?

The progressive spread of the coronavirus across the world and its impact on the world economy has been unprecedented. The entire global aviation industry is shut, and most if not all of the large economies of the world are either in full or in partial lockdown. The stock markets have also reacted according to the deteriorating state of the respective country’s economy, wiping out billions of dollars’ worth of investors wealth. Most companies are witnessing massive drops in the manufacturing and or trading activity levels. Given, the situation most of them are expected to report losses, and if at all some manage to stay in the green, most of them are expected to not to pay any dividends at least this year. Hence it would come to the mind of many investors who are into income portfolios to rejig their strategies. Has the sun really set on an income portfolio, as it is almost certain that for the next few quarters at least, no or very little earnings can be expected to accrue form such a portfolio? Is it time that the investor should look for other investment avenues while the situation improves on the dividend front and then come back when things are better again? Below we would discuss five important points that the investor needs to ponder before he decides to divest away his income portfolio.

The cost of switching – The most important consideration that one needs to look for is the costs related to transaction and brokerages that he is going to incur while making this switch from an income portfolio. Given the time factor, when the scope of making any profits at all from the stock markets seems like a mirage, portfolio switching may be an un-necessary and expensive cost for an investor. It is highly likely that they may not be able to recover their transaction costs from the new investments they make for a very long time. Again there is an implied cost of switching. While the dividend income strategy may have taken a breather during this crisis, but the situation could become normal sooner of latter, whereas switching over to a new investment strategy could very well have a longer gestation period before it starts to give any returns to the investor, whereby making the switch an expensive and loss-making proposition to the investor. Thus, before making a switching decision, an investor must make a thorough cost-benefit analysis to understand the implications of his decisions.

The other available options – The investor must also be certain in his research that the alternative that he is going to invest into by selling out his income portfolio is a viable option or not. In these periods when almost everything is in the red, choosing a good investment avenue is perhaps the most difficult decision in a stock market. If someone has been holding an income portfolio for a long time, he or she must have been enjoying a good long term yield rate. The new investment avenue must therefore offer the investor a better return profile, which in this market conditions is very difficult to achieve. Moreover, the investor should also add to the transaction costs to the prospective return figures from the new investment figures to arrive at his true potential return before he decides to sell his old portfolio. Such market conditions are generally very tempting considering the very cheap valuations of several stocks, but what one must be mindful of is the quality of the business he wants to invest into, rather than its intrinsic market price. It has been observed more often than not that constant dividend-paying companies are those who have strong businesses and are better placed to come out of a crisis early and strongly than companies who do not possess strong business model.

Quality of a portfolio – A market bottom situation, however, is a good opportunity to pick stocks for an income portfolio. This is the time when stocks with good long-term dividend history would be available at a discounted price, as several investors will be exiting these counters due to no or low-income prospects for the next few quarters. However, one must keep it in mind that when the situation improves, and they do for better-placed companies with long dividend history will be back to their old dividend rates. An investor who had bought these shares at the rock bottom prices stands to gain a very handsome long-term dividend yield once the period of turmoil is over. This is a good time, in fact when seasoned income portfolio managers make qualitative improvements to their portfolios.

Purchasing back the portfolio – An investor selling out his income portfolio now at rock bottom prices should also keep in mind that he will not be able to buy back his same portfolio at the same prices when the situation has improved. Even if the investor has made some substantial gains in between, and decide to reinvest in his old portfolio, he would not be able to get the same income yield that he enjoyed previously. This loss in income yield will be more tangible and would hurt the investor more as time passes by, making the short-term income made by the investor of little use. In other words, investing more money for making the same earning is a loss-making proposition in the long run than investing a small amount of money.

The relative earnings – The last yet the most important aspect that the investor might consider is the relative return form both investment options. While doing his research, the investor should give priority to long term returns rather than short term returns. As has been discussed above the long term returns from switching from an income portfolio is seldom fruitful, even if the investor decides to switch back to his old portfolio when better times prevail. Other than that it is also to be kept in mind that trying to make short term gains in a choppy market like this is very risk propositions. It is more likely that one will lose a significant amount of money if he tries to take a short position in this market. This market conditions can only be taken advantage of if one looks for a long-term position and is willing to invest a significant amount of time and research.