I recently wrote an article for Advisor Perspectives that examines the tradeoffs between investing for total return vs. income investing, in which one emphasizes assets that generate dividends and interest payments. In theory, if the markets are reasonably efficient, investors should not care whether they live on income generated by their portfolios or they sell assets to provide their income.
My article starts by looking at a study by Vanguard that compares income investing to total return investing. The Vanguard study concludes that a total return approach makes more sense. I find that the study’s results unfairly penalize income investing strategies and ignore certain important ‘real world’ effects.
I do not find that income investing is necessarily superior, but I do conclude that there is not reason for investors who are inclined towards an income-focused approach should be discouraged.