What do investors need in retirement?

• Retirement is getting longer, and retirees have more ambitions for their later years
• A longer retirement means greater risks from inflation
• A well-constructed stock market portfolio can be the key ingredient to preserve wealth

Many people in their sixties today can expect to enjoy 20 years or more in retirement. Their plans have become more ambitious, with far-flung travel, entrepreneurship, or extreme adventure on their bucket lists. However, the challenge is paying for it and the models that worked for previous generations may not work today.

A longer retirement means being far more alert to the potential impact of inflation. High inflation will erode retirement savings over 10 years, but over 20, it can be highly detrimental to an investor’s living standards. Although inflation has come down significantly from its highs of over 10% in 2022, there are still a number of inflationary forces in the global economy, from deglobalisation, to higher government spending, to the energy transition that threaten retirees’ standards of living.

This means retirement income needs to grow over time. Bonds may provide security, but in most cases, they do not grow with inflation. In contrast, company dividends have generally outpaced inflation, providing greater protection of the purchasing power of retirement savings over time. With this in mind, investors need to retain exposure to stock markets in later life.

That said, investors still need to be discerning. The dividends from UK companies, for example, are currently growing at an anaemic 2% per year. The sectors showing growth will vary depending on economic conditions and the stock market environment. Dividends in the mining sector will depend on the commodity cycle, for example, while banks will vary dividends in line with monetary policy. Prioritising companies and sectors that are expanding can deliver a faster growth rate than the market.

Separating the winners from the losers

This is particularly important today, when the economy moves faster, and technology is so disruptive. There are a number of clear trends that are separating companies into winners and losers. Investors looking to grow their capital and income over time will need to make sure they are on the right side of these major global shifts – from climate change to Artificial Intelligence (AI).

Finding long-term growth in income takes commitment, and it helps to have a clear track record. The Association of Investment Companies publishes its list of ‘Dividend Heroes’ each year – trusts that have grown their payout to investors year on year for over 20 years. This shows that the fund manager prioritises dividend growth, rooting out those companies that can grow their earnings consistently over time.

Murray Income takes dividend growth seriously. It has grown its dividend every year for 50 years, one of the longest track records in the market. This consistency has been helped by the structure of investment trusts that allows it to squirrel away income or reserves in the good years to pay out in weaker years. We have built up a rainy-day revenue reserve of over a half of the full year dividend that can be used to top up the dividend if necessary.

Achieving dividend growth

Our simple thesis is that for a company in the portfolio to grow its dividends, it needs to grow its earnings. To do this, it should have a sustainable competitive advantage, such as intellectual property, brands, scale, or a powerful network effect, be led by an experienced management team, have sound financial characteristics and robust growth opportunities.

We recognise that people in retirement rely on the income we provide. That means they don’t want surprises. As a result, we’re not interested in companies with very high dividend yields: it’s generally a warning sign that the dividend is likely to be cut. Instead, we’re keen to invest in businesses providing earnings resilience and sustainability, less volatility and with a greater margin of safety. In other words, companies that are more likely to deliver on their dividend aspirations.

Avoiding nasty surprises also requires effective diversification: the unexpected can always happen. The Murray Income portfolio is around 50 holdings – enough to make each holding count, but not enough to flatten out to a mean. We have thoughtful diversification with, as a rule of thumb, not more than 5% of the capital or 5% of the income coming from any one particular company.

Our overseas holdings add to this diversification. We can invest up to 20% of the portfolio in overseas-listed companies. This gives us exposure to companies and industries not available to UK-only investors. That includes companies such as L’Oreal in cosmetics, LVMH for luxury goods, Kone for elevators, Mastercard for payments and Microsoft for technology.

Unstoppable long-term trends

Finding pockets of growth in the global economy is vitally important to ensure retirement savings keep pace over time. Companies exposed to these trends have a natural tailwind. AstraZeneca and Convatec, for example, benefit from ageing populations, SSE and Rotork can ride on the coat tails of the energy transition. The increasing wealth of the middle classes in emerging markets should help Unilever and Inchcape. Finally, the dynamic of digital transformation should benefit holdings such as Sage, Experian and Relx.

Investing in great quality companies that are able to grow their earnings and dividends over time should allow the trust to continue its long track record of dividend growth. This is vitally important for investors in retirement, allowing them to preserve the purchasing power of their investments over time.

Investment objective

To achieve a high and growing income combined with capital growth through investment in a portfolio principally of UK equities.

Performance

Discrete performance (%)

Five-year dividend table (p)

Total return: NAV cum income, with net income reinvested, GBP. Share price total return is on a mid-to-mid basis. Dividend calculations are to reinvest as at the ex-dividend date. NAV returns based on NAVs with debt valued at fair value.

Source: abrdn Investments Limited, Lipper and Morningstar. Past performance is not a guide to future results.

The KID (Key Information Document) can be found here.

Charles Luke is a senior investment director at abrdn and investment manager, Murray Income Trust Plc.

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