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People invest for a variety of reasons. Some will be focused on achieving set goals, such as building a pot of money for their retirement. Others may need to generate an income from their investments to cover everyday living expenses or to treat themselves to a little extra.
The latter approach is known as investing for income. In this piece, we’ll give an overview of the concept and explain how to get started.
Put simply, this means generating an income from your investments in order to supplement other regular payments you’re receiving.
These investments will be chosen for their ability to deliver steady, reliable streams of income over particular periods. Such products can include bank savings accounts, individual equities and bonds, investment funds, buy-to-let property, and annuities.
Anyone can invest for income – and at any stage in their lives. It will all depend on their overall objectives and attitude to risk. For example, they may be retired and looking to generate a little extra to help cover expenses and improve their overall standard of living.
Alternatively, they may have a young family and need an extra source of revenue in addition to theirsalary to bump up their monthly disposable income.
In some cases, the income boost may only be required for relatively short periods, while in others it will be a longer-term solution to plug an ongoing gap.
This investing style should provide you with a steady income stream that can boost any regular payments you’re receiving. This can bolster your finances in a number of ways. During periods of high inflation, for example, the extra cash can help cover rising costs.
Meanwhile, when interest rates are very low, income investing strategies will help ensure the money put away will be working hard on your behalf.
As always, there are some potential downsides to consider. For example, companies paying substantial dividends may be long-established and stable. However, their share prices may be mired in no man’s land for long periods if the businesses have moved out of the growth stage and aren’t exciting investors.
It’s also worth remembering that no investment is guaranteed to make money. Individual companies or funds can underperform and fall in value.
The entry level for income generation is putting money in savings accounts with high street or online banks. These will pay you a set amount of interest on deposits.
However, these amounts are generally quite low and tend to get eroded by inflation, meaning your money will lose value over time. It’s for these reasons that people are often drawn towards equity or fixed income investments as they have the potential to pay out higher sums.
A number of investments are suitable for income-seekers. Here we outline the main types to see which are likely to be the most suitable.
The first option is buying shares in individual companies that have the potential to pay out a share of the profits – known as dividends – to shareholders.
Bonds, meanwhile, offer a fixed income in exchange for you ‘lending’ money to governments or companies in need of your cash. As well as the sum lent being returned at an agreed future date, investors will also receive interest payments on the original loan amount.
Another income investing option is property. The idea is buying actual bricks and mortar that can be rented out to generate an income.
Annuities, meanwhile, are income-generating contracts that are normally bought with retirement savings. The income provided will depend on when the annuity is purchased.
Buying individual income-producing assets, however, can be tricky. For example, you may put a lot of money into a handful of companies that end up defaulting, for you might not be able to afford the initial outlay required for a buy-to-let.
An alternative solution is opting for a managed fund and letting the person at the helm make all the necessary buying and selling decisions. There is certainly no shortage of such portfolios available, so you’ll need to do your research to find one that most meets your needs.
Some will cover individual assets, such as equities, while others will embrace a number of assets within the same overall portfolio.
Equity income funds can fit the bill nicely. These products look to generate returns above inflation and offer diversified exposure to many dividend-paying companies.
They will make regular income payments to investors – usually on a monthly or quarterly basis – although the amounts paid will vary and aren’t guaranteed.
There are income funds covering many different parts of the globe, including the UK and global. Which you choose will come down to your research and personal preference.
Equity income funds aren’t your only choice. Fixed income portfolios, which can invest in government and corporate bonds, depending on their objectives, are also popular.
You can view our range of Elite Rated fixed income funds here.
Then you have multi-asset income funds that can generate returns from a variety of sources, such as equities, bonds, cash, and property. Some portfolios are run on a fund-of-funds basis which sees a manager buying a number of funds, as opposed to individual assets. This provides an extra layer of diversification.
Property funds are also worth considering. So-called bricks & mortar funds invest in actual buildings and will generate income from rent received, but funds investing in property-related shares often produce an income too.
You can see all our Elite rated property funds here.
Income-seeking investors should also consider investment trusts. These are companies that are listed and traded on the stock market.
They are known as ‘closed-ended’ because there will only ever be a set number of shares available to buy, irrespective of the demand. Investors’ cash is pooled and used by the manager across a wide range of areas, depending on the trust’s overall aims and objectives.
The benefits of trusts include being able to hold back some of the income generated in good years to pay out when times are tougher. This makes returns smoother for investors.
Trusts also employ independent boards to look after shareholders’ interests. They will meet several times a year and constantly monitor performance.
You can learn more about investment trusts here.