Investing for Income: A Short Guide
This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Castlegate in Grantham.
Everyone’s financial goals are different. For many people (e.g. lots of people approaching retirement) their investment strategy might be primarily geared towards wealth preservation, perhaps to insulate their capital from market shocks as they prepare to buy an annuity. Others might be mostly concerned with generating an income from their investments, perhaps to help fund their child’s university education, to reinforce their pension income or to help pay for the cost of residential care.
In this short guide, our financial advisers here at Castlegate in Grantham will be sharing some helpful information about income investing, based on our years of experience helping clients devise tailored investment portfolios.
We hope you find this content helpful, and if you are interested in discussing your own portfolio with us please get in touch to arrange a no-commitment financial consultation, at our expense:
Different Income-Generating Investments
In 2019-20 interest rates have been sitting at an historic low for many years now. In fact, putting your money into most regular savings accounts these days can cause your money to erode in value due to inflation. You £1,000 might gain £5 interest over one year, for instance, but it might lose £10 in “real” value (effect of inflation) over the same period.
This situation has caused many savers and investors to explore other income-generation streams, resulting in an increased interest in “income investing” to try and supply a steady income stream which beats inflation.
Here, it is helpful to have a good grasp of different types of income-generating investments:
- Equities (shares). Investing in equities involves committing capital to various companies which then pay their shareholders (i.e. you) a share of their profits, known as dividends. In certain cases, the shares you hold in a company might increase in value, in which case you could sell them to generate a capital gain. These gains are usually subject to capital gains tax (CGT) and your dividends are usually subject to dividend tax, unless these fall under your annual respective allowances.
- Dividends. If you receive dividends from your company shares then you might take them as an income (as mentioned above), or you might choose to reinvest these dividends back into your income-generating assets. This is more of a long-term strategy for income investing, but it can be immensely powerful for increasing your income in the future. This is largely due to the power of compound interest, which allows you to earn “interest on interest”. Whether you decide to simply take your dividend income or reinvest it largely depends on your financial goals, and the time period you are investing over.
- Bonds (fixed interest securities). If a business or government needs to borrow money then you can lend it to them in the form of a bond, which generates an income for you in return. Bonds can often be a lower-risk investment if the borrower has a strong track record of repaying their debts (e.g. UK government bonds). However, there is a risk that the issuer might not repay their debts, and there is also the possibility of an interest rate rise (which would likely make the value of your bonds go down).
- Annuity. If you are looking for a guaranteed income in retirement then buying an annuity is a popular option. This is a contract, usually sold by an insurance company, which provides a guaranteed secure lifelong income which can be increased by inflation each year.
- Property. An asset that many people are familiar with, property (when planned properly) can be a good income-generating investment through schemes such as Buy To Let. Here, your tenants would pay you rental income which, in theory, should cover your expenses for the property whilst also generating a “profit”. It is also possible to invest in commercial property more “indirectly” via property funds and Real Estate Investment Trusts (REITs). You do need to be careful with property investments, however, as such investments can become illiquid (the ease at which it can be disinvested and converted back into cash). This has been witnessed in recent years when some property funds have become “gated”.
The Suitability of Income Investing
There is no universal standard which measures different individuals’ suitability to income investing. Arguably, income investing can be a valuable component, to a greater or lesser degree, within the portfolio of any investor.
Here are some examples of different kinds of savers who might consider income investing:
- Home purchasers. For those looking to accumulate funds for a house deposit, income investing can help you build up a larger sum, faster, compared to a savings account.
- Having children. When a couple start having children this can often put a financial strain on the household, particularly if one/both parents take a reduction in work hours or one of them stops working entirely. Having a supplementary income coming in from your investments can be a valuable way to help replace some of the loss in salary earnings.
- Those in retirement. As the state pension continually rises and as British citizens’ lifespans increase, having a reliable fund of money which generates a good retirement income is becoming more and more important.
Savers have always wanted their money to generate a healthy return. Yet in today’s world of historic low interest rates, income investing has become challenging .
In this article, we have outlined just a few of the income investing options you might want to discuss with your financial adviser. The way they apply to your situation, however, will vary depending on your investment goals, risk tolerance and personal circumstances.
If you are interested in discussing your own investment strategy with us please get in touch to arrange a no-commitment financial consultation, at our expense: