Investing guides

Income investing.

Whether you're new to investing or diversifying your strategies, this guide explains how income investing can benefit you.

The value of your investments may go down as well as up. You may not get back all the money that you invest. If you are unsure about the suitability of an investment product or service, you should seek advice from an authorised financial advisor.

A well-planned investment portfolio can help you achieve your financial goals. Not only can it build a solid retirement fund, but it can also provide a steady stream of income to support your lifestyle at different stages of life.

Income investing typically involves a mix of assets, such as dividend-paying stocks and bonds. The optimal investment strategy will depend on your specific financial objectives and how much risk you're comfortable taking on.

What is income investing?

Income investing is a strategy aimed at generating a consistent income stream from various investments. This includes dividends from stocks, interest from bonds, and other interest bearing accounts.

The goal is to create a reliable cash flow that can supplement your current income or cover your financial needs. This approach is particularly advantageous in retirement, as it can provide income to replace your salary once you stop working.

Income investment strategy

Selecting the right income investment strategy depends on your risk tolerance and financial goals. By understanding various strategies, you can create a portfolio that suits your needs. Here are three approaches to consider:

Income focused conservative: For guaranteed income, minimal risk investors may focus on government and investment corporate bonds, with a small portion in stocks. Most income may come from interest, with some potential for dividends.

Income focused balance: Moderate risk investors might prefer a balanced strategy, including equal shares or ETF's, stocks and bonds. ETF's and stocks pay dividends on a quarterly basis, though some pay annually, and a small few pay monthly. Bonds will pay a coupon. The coupon amount represents interest paid to bondholders, normally annually or semi-annually.

Income focused growth: Investors with a high-risk tolerance may opt for a growth strategy. Building a portfolio that targets income growth will be invested in stocks, which means the income received will be from dividend payments.

Things to remember: Once understanding your risk appetite, focus on stable and reliable assets with consistent pay-outs. Ensure that you can stay updated on news related to your investments and the sectors that you have chosen. Always regularly review and adjust your portfolio to ensure it continues to meet your financial goals.

How to find income investments

When seeking income investments to build a portfolio, the following metrics can be used:

Bonds: Bonds with high credit ratings are likely to provide reliable interest payments. There are two types of bonds: corporate and government. The main difference between the two bond types is that corporate bonds are riskier than government bonds. However, because of this higher risk, corporate bonds usually offer higher bond yields than government bonds.
Dividends yield: The dividend yield is determined by dividing the annual dividend per share by the current market share price and expressing the result as a percentage. It represents the percentage of a company's share price paid out as dividends each fiscal year.
Pay out ratio: This ratio indicates whether a company can sustain its dividend payments over time.

When comparing the two dividend measures, it is important to understand that the dividend yield shows the cash return rate to shareholders, while the dividend pay out ratio indicates the portion of a company's net earnings paid out as dividends.

Benefits and risks of income investing

Understanding the risks of income investing and making sure your investments match your goals and risk tolerance is crucial. Diversifying, doing research, and regularly reviewing your portfolio are key to managing risks and getting the most out of your income investments.

Benefits

Provides steady income through dividends or distributions, supplementing other sources of income.
Offers the chance for your investments to grow as the value of the securities increases over time.
Lower risk by spreading investments across various asset classes, sectors, and regions.
It is particularly suited for risk-averse investors or those nearing retirement who prioritise income over aggressive growth.

Risks

Stock prices can go up and down, affecting your portfolio's overall value.
Companies might cut or stop dividend payments during tough financial times or economic downturns.
Bonds and similar investments can lose value when interest rates change.
Investing in high-yield or lower-rated bonds carries the risk that the issuer might default or fail to meet debt obligations.

What is the difference between income and growth investing?

What is fixed income investing?

Are dividend stocks better than growth stocks?