Income investing is a term you have probably heard before, but what exactly does it mean and how do you go about earning a regular sum from your investments?
Sections
What is income investing?
Income investing, or investing for income, is where you structure your investment portfolio to provide you with a regular income.
This could be through dividends, income payments or bond yields.
What you are aiming to achieve is a regular income from your investments alongside long-term capital growth.
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Who is it suitable for?
Income investing appeals to most investors – who doesn’t want to combine capital growth with regular payments into your bank account?
But it is particularly attractive to pensioners looking to supplement their existing pension income or invest their pension pot to give them the best possible investment income.
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How do you do it?
In order to draw an income from your investments you have to place your money into specific asset classes as not all investments pay an income.
Here's a rundown of the key income-bearing assets.
Government bonds and gilts
Buy one of these and you are effectively lending your money to the government in question for a fixed period.
They are low-risk as the Government would have to default in order for you not to get your money back and they pay a regular income.
Corporate bonds
Much the same as a government bond except you are lending your money to a company for a set period of time in return for a regular income.
These are slightly higher risk than government bonds as there is more chance of a company going bust.
Just how much risk you are taking is usually reflected in the yield on the bond.
The higher the risk, the higher the reward so a big yield means a bigger risk.
Shares
Buying shares for income involves picking companies that pay regular, healthy growing dividends and are likely to continue to do so.
Collective investments
Selecting individual stocks that will pay you a regular income can be time-consuming and high risk.
If the stocks you choose reduce your dividend, stop dividends completely or the share price tanks your nest egg could be significantly dented.
One way to minimise that risk is to opt for a collective investment such as a unit trust or investment company instead.
You can invest in a fund that are specifically designed to generate an income.
These income funds will invest in a range of asset classes including stocks, property, bonds and gilts in order to provide fund holders with a regular income.
Property
If you own a property you benefit from any increase in the asking price when you come to sell and, if you rent it out, a regular income too.
If you want to draw an income from property you can either invest in a buy-to-let property or a property fund.
Cash
While obviously not an investment, you can put your money into a savings account that pays a regular income.
You can either choose to receive an annual sum – most savings accounts only pay out interest once a year – or seek out a monthly interest account which will pay you a return on your cash every four weeks.
What are the drawbacks?
Income investing offers the combined benefits of a regular monthly sum plus the potential for capital growth, so surely all investors structure their portfolios for income?
No, as with anything there are pros and cons to income investing.
The benefits are explained above, but the drawback is that you might sacrifice the opportunity for bigger capital gains in order to get that regular income.
Companies that pay a dividend may not see as much growth in their share price as other non-dividend paying firms as they are using some of their profits to pay dividends rather than reinvesting it in the business in order to grow.
So, if you don’t need the income you may forego stocks paying big dividends to chase the potential for big capital gains offered by other shares.
Also, your income may not be guaranteed.
A company can stop paying a dividend, a fund’s income can shrink, or a company can find itself unable to honour its bonds all of which could have an immediate affect on your regular incomings.
The information included in this article does not constitute regulated financial advice. You should seek independent, professional financial advice before making any investment decision.
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