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Investing for income is a stream of income that is created from part or all of your investment portfolio. This income may provide you with cash flow for lifestyle needs and payment requirements, but is more often a secondary form of revenue.
To generate income through investing, there are a few factors that can affect performance, success and your overall return of investment (ROI). This guide will take you through the dos and don'ts of investing for income and the types of investments that are the best option for your personal financial objectives.
How does income investing work?
Income investing involves building up your investment portfolio for the purpose of bringing in a regular and consistent stream of income. Investors that have an income-stream focus have financial goals that are centred around generating cash flow rather than generating capital gains over a longer period.
Investment income is built for a number of reasons, the main one being a means of passive income during retirement. However, investing for income can be a valid investment strategy to pursue at any life stage. Whether investing is your main form of fixed income or a supplementary source of revenue, you can grow your savings accounts by a large sum with reliable investments.
There are many different types of investments that can be used to generate a cash flow income stream, including both physical asset purchases like real estate and share investing, including dividend payments, bonds, exchange traded funds (EFTs) and trading on the stock market.
Investing factors to consider
Since there is no formula or specific process that needs to be followed for income investing, it is always important to consider four main factors:
- An investor's financial goals
- Personal finance situation
- The estimated time horizon
- An investor's risk tolerance
With these in mind, you can begin to build your investment portfolio to produce a passive income stream that can be a primary or secondary source of revenue.
Types of investing for income purposes
There are a variety of ways you can generate income through investing and building assets. From corporate bonds to real estate investment trusts, take a look at the types of investing income streams below:
Bonds are a form of investment that are issued by large corporations, companies and agencies as a way to raise money. An issued bond will have a maturity date in the future and has a face value that is what your purchase price will be.
In exchange for money raised, a bond will pay interest payments at a specified rate. This payment is usually received on an annual or semi-annual basis.
Real estate investment
Generating income through investing in real estate is a great option as it can provide a very stable flow of revenue. Whether you choose to invest in a residential, commercial or even industrial space, you can receive consistent rental income and a stable cash flow.
Although real estate investments are a very popular choice, it can be a much more hands-on job than buying stocks or bonds. You must consider additional costs such as maintenance fees and property tax, and the ongoing upkeep of a property can take a lot of time and effort. Real estate investments are also considered to not be a liquid asset because they cannot be sold as quickly or easily as other securities like stocks. With this in mind, managing properties as a form of income investing is a great option, if you are willing to be an active participant.
Money market funds
You can also generate income from money market mutual funds, which are funds that invest in a variety of market instruments like cash, government bonds and repurchase agreements. The yield on a fund like this will fluctuate with interest rates and can be sold easily if it is needed.
Our partners at ASR Wealth Advisers (ASRW) can provide information as to whether money market mutual funds are a beneficial option for your financial goals. Having a small part of your portfolio within a fund like this can be advantageous in supplying a steady stream of income without any extensive research or active participation. ASRW's Investing Report product helps you to review your current portfolio to see whether money market accounts are the right option for you.
Dividend paying stocks
A dividend stock is a share that pays dividends to its shareholders. The dividend yield is the current level of dividend payments (annually) per share divided by the current share price.
When researching dividend payments for income purposes, investors will want to look at the cash rate of the dividend per share, as well as the overall dividend yield of the stock. With most dividend payments paid on a quarterly basis, this form of income investing can be very consistent and reliable within your investment portfolio.
Our partners at ASRW could help you find potentially rewarding dividend stocks using tools such as the Investing Report. This monthly report provides investors with research and explores the companies that are paying a high dividend within Australia at the time of writing.
Mutual funds and EFTs
Exchange traded funds (EFTs) and mutual funds are types of pooled investments that hold assets such as stocks, bonds and real estate investment trusts (REITs) all in one place. Some funds can be actively managed by the individual, while others can be left up to a financial advisor to monitor. Within this realm there are also index funds where the securities are matched up with the current underlying index.
The great benefit of using mutual funds or EFTs as a form of investing for income is that they offer management from a knowledgeable and trustworthy professional. Your financial objectives of building a passive income stream can be fulfilled efficiently, while your portfolio remains diverse and stable at the same time.
Benefits of income investing
The overall benefit of income investing is that you have a passive income stream in which you get a steady flow of revenue. In optimal conditions, this passive income should be attainable without extensive management, time and effort, however it may take some active participation to get started on your investing for income journey.
There are, of course, pros and cons to every investment process, and with income investing there is no exception:
Additional income and revenue is one of the main benefits of income investing. For any stage of life, but especially just before and during retirement, having assets that supplement other income sources like the age pension could be extremely advantageous. It can serve as a safety net for both retirees and younger investors, and can be used in any way an investor chooses.
Opportunities for capital appreciation
Capital gains or appreciation can be a great way to build both your lifetime income and your generational wealth in the years to come. If you opt for investment in stock dividends, bonds or mutual funds, your assets could potentially appreciate in value in addition to the income stream they provide you with.
As with any investments, there is always the risk of market fluctuation. If the current market is experiencing downturns, your investment income stream may be affected accordingly. With this in mind, it is always a good idea to keep a diverse portfolio that has assets of all different types and amounts.
While there is the pro of capital gains and appreciation of securities, investing for income is a two-way street and can eventuate in losses. Stocks, bonds, REITs, mutual funds and ETFs can all decline in value based on market trends and external circumstances such as when interest rates rise.
Because of this, it is essential to understand your risk tolerance before jumping into investing for income purposes.
How does payment and taxing of investments work?
Many investors who generate income from dividend payments or other securities find payment and taxing quite a simple process.
Each type of investment is paid out according to a different time schedule, for example, bonds are typically paid on a semi-annual basis while dividends are paid quarterly. With this in mind, the taxation of your investment income may differ as well, depending on the type of investment you have. Dividends received from shares for example, are classed as a form of income, meaning they are added to your employment income before being taxed at your marginal rate.
At ASR, our Wealth Advisers will take you through the taxation processes required for each investment type you have chosen, and will evaluate your income investing with both payment and tax in mind.
Overall, investing for income could be a great way to earn passive income that can be used as a primary or supplementary source of revenue. For those who wish to invest in money market funds, a managed fund, shares in Australian companies or alternative investments, using these securities for income can be extremely beneficial in the long run.
Take a look at ASRW's Investing Report today for more information on the tools and resources you could need to get started on your investing for income journey.
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All information in this article is of general nature only; it is not intended or to be construed as an offer, solicitation or recommendation for any financial product and does not take into account your financial situation, objectives or needs. Before acting on the information herein you should consider whether it is appropriate for you in light of your personal circumstances. Where applicable, you should obtain and consider a Product Disclosure Statement, Prospectus or other relevant disclosure material and seek professional investment advice prior to making any decision to acquire or dispose of a financial product. Investing in financial markets and instruments involves risks, including loss of some or all capital. The payment of income and the return of capital are not guaranteed. Past performance is not an indicator of future performance. Whilst the information presented herein is believed to be reliable and obtained from trusted sources, ASR does not make any representations as to its accuracy or completeness.