Seven Principles of Investment - No.2: Fixed interest is better than variable

In a time of uncertainty, this much is clear. Fixed income beats variable income every time. Most of us are used to thinking about this choice through a mortgage on our property. Finance companies have long offered both fixed and variable options.

If you are seeking income to live on now or to build up your savings for the future, then knowing – in advance
– what you will receive and when you will receive it is crucial. It is also crucial to be confident that your income will continue and not suddenly be reduced because of rate changes.

Some investors have a portfolio of stocks and shares that they have centred around decent dividend yields.
In years past, this used to be an effective strategy. Not any more. With many companies losing sales and facing economic hardship, one of the first things to go is the payment of the dividend, either partly or completely.

Tesco has just been slated for paying a dividend. Why? Cash is king... the experts believe institutions are wiser to retain reserves at the moment. It’s a massive turnaround for commentators to react negatively to a company that pays its dividend. Normally they berate a company for reducing or cancelling a dividend payment!

If we take everything together, variable income is only worthwhile considering if at least one of these criteria is met:

1. Bank base rate is likely to increase substantially - and soon.
2. Variable-rate income now is so much higher than a fixed rate.
3. Share prices are solid, profitability is growing and cashflow producing surpluses. Then dividend flows are more secure.

At this moment in time, none of these conditions are satisfied. Banks and building societies offer derisory rates which they can reduce at the drop of a hat. Variable rates are barely higher than fixed rates, and dividends are being chopped across the board.

At Avantis Wealth, we are massive believers in investors being assured of what they will receive in return for investment – fixed income with a fixed payment schedule, whether monthly, quarterly, six-monthly or annually.

Read about all 7 principles of investment by downloading our report. The report equips you with the knowledge of how to improve your chances of success and make the most of your investment portfolio.