Three ways investors can target a rising income

25/11/2019

Having carefully squirrelled money away for your retirement, you may have reached a stage where you now want to transform those savings into income.

Glossary

For explanations of the investment terms used throughout this article.

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Rather than sporadically dipping in to your account, you might instead direct your investments towards delivering a regular income stream. Provided you can accept some level of risk, there is a range of investments that can perform this role.

It could also prove a more sustainable strategy to draw a “natural income” from your portfolio. This is where you might look to enjoy the income that your investments generate in perpetuity without selling them down. Left intact, your investments can be there to draw upon as and when you need them, perhaps to cover potentially unexpected costs or to fund gifts to loved ones or good causes.

Why pursue a rising income?

To maintain your standard of living in retirement, your income needs to keep pace with inflation – the rate at which the price of goods and services is rising. This can be especially hard when inflation is higher than interest rates.

A range of investments can deliver an income that rises in line with inflation, or even outpaces it, if they are successful. Conversely if they do poorly, the income they spin out could fall.

There is typically a trade-off between the security of income from investments and their potential growth in income. Importantly, income from investing can never be guaranteed and you could lose some, or even all, of the money you invest.

While there is a wide breadth of investments that have the potential to provide an income that rises over the long run, here’s how the three main asset classes could play a part.

Dividends, coupons and rent

  • Company shares

    Companies can share profits with their shareholders through cash distributions known as dividends.

    Some companies, or rather their management, are committed to raising their dividends year after year. Of course, if profits fall they may be forced to cut their payout or suspend them altogether.

    Nonetheless, if a company is committed to paying a regular and rising dividend stream, it could be understood to reflect a focus on profitable growth. Dividends can therefore help ensure a company grows in a sustainable fashion, while rewarding long-term investors.

    Not only can successful approaches to dividend investing deliver a rising income, but they can also offer the potential for meaningful capital growth. If a company has the discipline and profitability to pay a growing dividend, we might expect their share prices to rise over time.
  • Bonds

    When you invest in bonds, you should receive regular income payments over the life of the bond, known as coupons, from the government or company that issued it.

    Most bonds normally pay a fixed coupon that is agreed when the bond is first issued. However, where coupons are fixed in value for the life of the bond – often several years – the real value of this income could be reduced by inflation.

    Investing in inflation-linked bonds can mitigate this risk. By linking coupons to general price increases, the income will rise in line with inflation, so you should be left no worse off – unless, of course, the bond issuer fails to keep up with payments (an unavoidable risk for bond investors).

    If inflation falls, however, so would the income from inflation-linked bonds, in contrast to bonds whose coupons are fixed. If inflation falls, protection from it rising can therefore come at a price.

  •  Property

    When you invest in commercial property, your income ultimately comes from the rent paid by tenants of the offices or shops you essentially own a part of.

    Like flats or homes, commercial property will generally be rented out for fixed periods of time, typically several years. So long as tenants meet their obligations and the property remains occupied, a regular rental income will be paid to the landlord for the life of the lease. At the end of this term, rent will be reviewed.

    So long as a landlord can raise rents over the long run, they will be able to deliver rising levels of income for their investors. Moreover, it follows that if a rising income can be generated from a property, its capital value might also be expected to rise.

Going down the fund route

Professionally managed funds, which combine a range of assets into a single investment, will aim to achieve a specific objective that could resonate closely with your own personal investment goals.

Fund managers will aim to achieve their objective – which could be to deliver a regular and rising income to their investors – over a given period by selecting and managing a combination of assets. When funds generate income from their investments, that income will be paid out to you on a regular basis – annually, quarterly or even monthly, depending on the fund – if you choose to own income shares.

While each fund may aim to achieve its objective in any market condition, there can be no guarantee since the value of the fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested.

The views expressed in this document should not be taken as a recommendation, advice or forecast. If you’re at all unsure about the suitability of any investment, please speak to a financial adviser.