Don't diss the dividend

Investors often assume that only conservative funds can be used if an income is required from an investment. This however is not an ideal strategy for large discretionary investments that attract income tax at the investor's marginal tax rate. Income tax reduces the effective return/income on the investment to levels sometimes below that of inflation which in turn reduces the purchasing power of the income each year. Including other sources of income in a portfolio would serve to diversify a portfolio away from interest-rate sensitive assets while reducing the tax liability.

Dividends can also be used as a source of income as dividend yields on the market have increased to levels last seen at least 4 years ago, with the financials and general retailer's indices trading on dividend yields of 6.2% and 6.42% respectively. Buying the financial index, or a financial unit trust fund, at these levels would mean the investor receives a tax-equivalent return of 10.3% (with a 40% tax rate, ignoring capital risk), which compares favourably with money market investments, with the income stream growing each year as companies grow their profits.