A focus on income

When share prices are experiencing times of intense volatility, an interesting and valuable exercise is to closely examine the consistency of the income produced from your share portfolio. It is a useful physiological and investment tool at times like these.

The bottom-line is that although share prices go through periods of sharp rises and falls, dividend yields from widely diversified portfolios remain pretty stable.

Retirees in particularly seek a consistent income from their investments that will be relatively undisturbed over the short and long terms.

The average dividend yield from the All Ordinaries for every February over the past decade are: 3.44% (1999), 3.39% (2000) 3.40% (2001), 3.29% (2002), 4.33% (2003), 3.84% (2004), 3.74% (2005), 3.74% 2006), 3.78% (2007), and 4.58% (2008).

Indeed, average dividend yields have not only remained pretty consistent but have, of course, risen as share prices have fallen.

Key questions to ask yourself at this time include: How much income will my retirement savings return after inflation, taxes and fees? This is of most importance for anyone nearing retirement.

Obviously, the more that you will have to delve into your capital to pay your living costs, the ability for your portfolio to generate income is reduced.

Of course, retirees over 60 whose income is solely from a superannuation pension are not taxed on this income.

It is really worth emphasising the value of a diversified portfolio when discussing long-term dividend yields because a small minority of companies is unable to keep paying dividends at a consistent level.

And some individual companies may be paying exceptionally high dividend yields because their share prices have been marked down by the market with good reason.

Most retirees have to draw down on some of their capital - meaning that most cannot afford to concentrate solely on the income being generated by their portfolios.

And never overlook that a crucial reason for being in the share market in the first place is to earn sufficient capital gains over the long term to keep inflation at bay.