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Guidance

Generating income from investments

Investing for income: What you need to know

There are a range of ways to generate income through investments, including through cash, fixed interest, and in some cases property and shares.

Here we take a closer look at some of what’s available and the potential benefits and risks involved.

Different asset classes each come with their own related risks, which you should be aware of before investing, and as with all forms of investing it’s important at the outset to consider these in the context of your personal situation and goals.  

Cash

Interest-earning savings accounts and term deposits are two examples of ‘cash investments’ that can be used to generate an income stream, through interest paid at regular intervals. This also can offer the benefit of compounding if left in your account.

The benefit of using cash invested with an APRA-regulated institution, such as a bank, as part of your strategy is that the risk of losing everything is small.

The flipside is that during periods when interest rates are low, if you're unable to generate more than the rate of inflation from a cash investment then the value of this cash will actually decrease in real terms over time.

This is why it can also pay to look for alternative sources of income for your portfolio.

Fixed interest investments

For investors looking to access corporate or government bonds, there are a number of options available.

You can buy and sell some corporate bonds on the Australian Securities Exchange (ASX), while managed funds and exchange traded funds (ETFs) can also be a way to invest in this asset class.

There are a range of managed funds available that align with an income-specific investment objective, with professionals actively managing the assets of the fund.

These funds might invest in government and corporate bonds as well as other income-focused securities. A comprehensive list of funds is available on the Colonial First State (CFS) website.

ETFs that aim to mirror the performance of particular types of bonds, as well as those that track the performance of high dividend stocks, are also available to trade on the ASX with more information available through CommSec.

Property and shares

Shares and property are both generally considered 'growth' assets – that is, investments which investors primarily choose because they expect them to increase in value between the time they buy and sell them – in other words, generating a capital gain.

But shares and property can also contribute to an investor’s income objectives.

In the case of shares, this would take the shape of dividends, with those stocks that pay high, stable and regular dividends referred to as ‘high yield’.

In the case of property, it is rental payments that form the income stream. While typically investors associate rental income from holding ‘real’ property, there are many ways to invest.

Listed property, such as real estate investment trusts (REITs), for instance, will distribute income to unitholders on a regular basis, in a similar way to which shareholders receive dividends.

One thing to be aware of is the risk profile associated with growth assets – because if the capital value of those assets drops significantly, for instance, then the income may seem relatively trivial in the end.

Investing for income and superannuation

Depending on lifestage, goals and risk preferences, people will tend to select investments with the aim of either generating capital growth over the long term, generating regular and predictable income, or some combination of the two.

As you get closer to retirement, you may be relying on earnings from your investments to fund your lifestyle for instance.

In this context, regular income that can keep up with inflation will typically become more important than it might previously have been, which is why lifecycle superannuation funds tend to move a greater portion of funds into defensive, or lower risk assets, as members near retirement.

Even for people not yet close to retirement but who are more conservative in their preferences, income investments can provide a way to build wealth over time, if the income generated is reinvested.

These income assets also form an important part of a diversification strategy for all kinds of investors.

What are the risks of investing for income?

One of the key risks associated with investing for income is the fact that these assets tend to have slower capital growth. So if too great a portion of your money is allocated to them, it's possible that your overall portfolio won't grow in value to the extent required to meet your financial goals.   

This is particularly so in periods when interest rates are low.

Regardless of whether you are pursuing income or growth, it’s always important to make sure that you are not overexposed to an asset class and that quality in your portfolio is maintained.

 

 

 

 

This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. Investors should consult a range of resources, and if necessary, seek professional advice, before making investment decisions in regard to their objectives, financial and taxation situations and needs because these have not been taken into account. Any securities or prices used in the examples, including but not limited to Exchange Traded Funds given are for illustrative purposes only and should not be considered as a recommendation to buy, sell or hold. Past performance is not indicative of future performance. Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814 (CommSec) is a wholly owned but non-guaranteed subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945 and a Participant of the ASX Group and Chi-X Australia.