With the fall of the Selic, see if it is still possible to live on a fixed income – 03/22/2024 – From Grão to Grão

When you consider living off income from investments, you immediately imagine investments such as dividend-paying shares or real estate funds. However, the majority of Brazilian investors are more conservative. Therefore, these products do not appear to be an interesting option for the majority. However, in a country with high interest rates like Brazil, it is possible and much more interesting in terms of return per risk to use fixed income as an income vehicle.

The comparison is not only with the rate, but also with the frequency of receipt. Let’s start with this comparison.

Most stocks do not pay dividends monthly, but rather semi-annually or annually. In fixed income, most bonds also follow the same periodicity in paying interest.

There are also fixed income securities, both public and private, that pay interest monthly. For example, public bonds such as Renda+ and Educa+ are examples of bonds with monthly payment periods.

Therefore, those who invest in fixed income are not disadvantaged in terms of payment flow. The point is just to diversify the bond maturities to spread the payment throughout the year.

The other point in question lies in the percentage of interest and dividend payments. Without a doubt, in fixed income, one would expect a lower payment percentage than in higher risk alternatives. However, that’s not exactly what always happens.

For example, consider the B3 dividend-paying stock index, the IDIV, which brings together the largest dividend-paying companies on the Stock Exchange.

IDIV yielded the equivalent of 11.1% per year over the last 10 years. This return already includes both the payment of dividends and capital gains. When compared to inflation for the period, this profitability is equivalent to IPCA+4.9% per year. We can imagine that the capital gain was just from inflation and investors earned 4.9% per year exempt from income tax.

This result is interesting, as it is in line with the return of the index of American dividend-paying stocks represented by the DVY ETF. Considering American inflation (CPI), this index yielded the equivalent of CPI+5.3% per year.

Returning to fixed income, we can evaluate alternatives with equivalent and even greater returns.

Even with the fall in the Selic, it is still possible to build a well-diversified portfolio of private bonds that provides a higher income tax-free interest income than the dividend shares presented above.

Corporate credit fixed income securities with good credit quality pay an average remuneration of IPCA+6% per year exempt from income tax.

Therefore, an investor who does not wish to suffer from the rise and fall of shares can build a portfolio with more than 30 high-quality fixed income assets, be well diversified and live with an income higher than that observed from dividends in the last decade.

For those who do not want to take the risk of private credit, it is also possible to set up a long-term portfolio with public bonds and have a gross income tax return of more than 5.8% per year.

The net income tax return on public fixed income securities may be lower than the dividend on shares, but the investor will have greater security in receiving it.

Therefore, even with the fall of the Selic, it is still possible to build a long-term portfolio of public and private fixed income securities with returns comparable to those of living off income from stock dividends.

Invitation for me to analyze your financial challenges:

I would like to take this opportunity to draw your attention to this week’s article in the I Comment Your Money column. In this new column, I comment and clarify readers’ financial challenges. If you wish, I can comment on your question. To send your question, write an email to me describing the problem and putting in the title: Comment my money. In the email, mention your profession, age, tell a little about your story and explain your dilemma in detail.

Michael Viriato is an investment advisor and founding partner of Investor’s House.

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