Investing for income
Investing for income means choosing assets that are able to provide you with a regular income. This is in contrast to investing for growth, which focuses on how much your assets could gain in value. You may want to use both approaches as part of a wider investment strategy.
Here are some of the common investment asset classes that are used to generate a regular income:
Equity income (stocks & shares)
Choosing stocks and shares for income investors involves identifying companies with stable or growing dividends that look likely to continue to be paid out over the long term – although past performance can't be used to accurately predict future income.
If you don't have the time or expertise to research individual shares, you may want to consider investing through an equity income fund. With a fund, your money is pooled with that of other investors and used to buy a diverse range of shares, with dividends paid out to investors on a regular basis (usually every quarter or every six months). This approach allows you to spread your risk across regions, sectors and sizes of company, with an experienced fund manager making the day-to-day investment decisions. Remember that investing in equities carries risk; you could lose some or all of your original investment.
Fixed income (bonds)
A bond is essentially a loan made to a company or government, which is repaid by a given date (the maturity date) and pays a fixed rate of interest (the coupon). You buy units in a bond, which you can either hold until their maturity date, at which point their face value will be repaid, or you sell them on the stock market, in which case their value may go up or down. For as long as you hold the bonds you will be paid the coupon, in other words the amount of interest.
Often referred to as "fixed income" or "fixed interest" investments, bonds are traditionally thought to be less risky than equities, but the level of income generated by bonds has dropped slightly in recent years. Government bonds (gilts) are thought to be less risky than corporate bonds, as governments are extremely keen not to default on loans and are believed to be less likely than companies to go bust and be unable to pay you back.
Commercial property involves investing in property such as office buildings, shopping centres and other commercial buildings, with returns generated in the form of rental income from tenants. If the value of the property rises, you could also see some growth in the value of your original investment (capital), but if the property's value decreases your capital could be eroded or lost. Because investing directly in commercial property is too costly for most individual investors, many choose to invest through a fund that owns a portfolio of properties, helping to spread risk as well as cost.
Buy-to-let is another form of property investment aimed at generating an income through renting out houses or flats. You will have to cope with the uncertainty of vacant periods and costs for repairs, maintenance and finding tenants. For investors who don't have sufficient cash to buy and maintain a property outright, it is possible to fund the purchase with a buy-to-let mortgage, provided you have at least 20 per cent of the property value as a deposit.
Building an income investment strategy
A few pointers…
As always, it's important to make sure that your investment strategy is compatible with your goals, circumstances and attitude to risk. There is no "right" way to invest; different strategies will produce different results.
It's generally a wise approach to spread your investments across different types of assets. This is called diversification, and can be achieved through choosing a good mix of investment funds or opting for a multi-asset fund. Investing should be considered a medium to long-term commitment (at least 5 to 10 years) in order to reduce the impact of short-term market fluctuations over time. You should also consider using your tax-free ISA allowance to make the most of your returns.
You might be happy to join the ranks of the UK's “DIY investors”, selecting your own investments and overseeing your own portfolio. Alternatively, a financial adviser can help you decide on an investment strategy that suits your goals and attitude to risk and offer bespoke advice tailored to your circumstances.
Compare investment platforms
If you are interested in choosing shares or funds for your portfolio, you'll need to open an account with an investment platform. These can vary considerably in how much they charge you for their service.
We have built a tool to help you compare the charges, and features, of 15 investment platforms in the UK:
Last updated: 08 June 2016