Why relying on shares for income can be risky business

Why relying on shares for income can be risky business

Fixed income, bonds, BondAdviser, equities, stocks, shares, share market, equity market, investment management, retirement planning, retirement savings, wealth management, Commonwealth Bank, Telstra

Trying to build a reliable income stream using shares carries a number of risks that investors can often overlook, a fixed income researcher has cautioned.

Research firm BondAdviser noted that while company reports recently issued on the ASX have been mostly positive, there are always “winners and losers in the equity market” and this can significantly affect stocks’ ability to provide income.

The company gave Telstra and the Commonwealth Bank as examples of the risks investing in equities for income can have, noting that the former announced 30 per cent cuts to its dividend pay-out while the latter’s price took a hit following allegations of significant compliance breaches.

“Although these equities get branded as ‘blue chip’, last month’s swift market reactions highlight a risk with using shares for income,” the company said.

“In both cases, the annual dividend yield for these respective companies was eroded meaning future dividends will be utilised to recoup capital losses. Given one of the foundations of income investing is capital preservation, shares evidently do not fit this criterion.”

BondAdviser warned investors to be mindful of the potential for capital volatility in the future and not simply get swept up in the promise of additional yield that stocks can sometimes offer.

Why relying on shares for income can be risky business
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