What is income investing?
Income investing refers to investment approaches that are aimed particularly at generating a consistent income stream. Traditionally, the assets that have been used most widely for this purpose are equities, bonds and cash-equivalents.
The goal is to create reliable periodic cash flows that can supplement current income, as a type of secondary income source. For retirees, the approach can be even more important as an income source that replaces employment income.
Where to look for income
Traditionally, the three main areas of focus for income investors have been dividends from equites and interest payments from bonds and cash equivalents, including money market funds.1 We look at these areas in more detail.
1. Equities
Equities (or stocks and shares) are probably what many people think of when it comes to investing. Equities represent a proportion of the ownership of a company. When you buy shares, you become a part owner of that company – a shareholder.
For income investors, the most important consideration is whether the company pays a dividend. Many companies (particularly those that are large and well-established) pay out part of their profits to investors in the form of dividends. For income investors it is especially important that dividend payments are reliable and sustainable.
Beyond regular dividend payments, equity owners also have significant potential for capital growth if company profits rise over time and the share price also rises. The flipside of this however is the risk that the company does less well, resulting in a declining share price and potentially reduced or no dividend payments. As such, of all the main income-generating asset classes, equities are the seen as the riskiest.
2. Bonds
A bond is effectively a loan, usually to governments or companies that need to raise money. Buying a bond when it’s issued means you’re lending money to the issuing entity for a predetermined period of time. In return, you’ll receive a promise of regular interest payments, known as coupons. The issuer also promises to return the original borrowed amount back to the bondholder at the end of the agreed period.
Bonds are often referred to as ‘fixed interest’ or ‘fixed income’ investments. This is because their regular interest payments are set and can’t be changed or stopped at the discretion of the company as equity dividends sometimes can. As such, this is one of the factors that tends to make income from bonds more reliable than equities.
Bond market values can go up and down in response to factors like interest rates, inflation and the perceived ability of the issuer to make the payments due under the bond. However, in general the extent of variation in bond prices (i.e. volatility) tends to be much lower than for equities.
Prices and yields of bonds depend partly on the market’s assessment of credit risk – i.e. the risk that the issuer won’t be able to meet its payment requirements. This risk is seen as very low for bonds issued by highly developed countries, such as the US and Germany. Credit risk is generally higher for company bonds, but there’s a wide spectrum, with lower risk for investment-grade and higher risk for high-yield bonds.
3. Cash Equivalents
Cash equivalents are short-term, highly liquid investments that are easily convertible to cash and have a very low risk of significant changes in their value. Examples of cash equivalents include treasury bills (short-term det issues by governments), commercial paper (short-term debt issue by companies) and certificates of deposit (CDs) for maturity periods of less than 90 days.
Money market funds are also considered as a type of cash equivalent since they invest in a range of other cash equivalents. They aim to provide a stable investment with liquidity and a yield slightly higher than cash in banks savings account.
While cash equivalents are closely related to cash, they are not the same. Cash refers to physical currency and demand deposits. Cash equivalents, on the other hand, as the name suggests, are short-term investments that can be very easily converted to cash. Being investments, they do have some small risk compared to cash, which is why they can typically offer slightly better income than cash bank accounts.
How to invest
When it comes to income investing, it’s quite possible to invest directly in different asset classes. However, for most individual investors this is likely to be labour-intensive and time-consuming. This is especially true of equities and bonds since they need to be monitored regularly to assess the sustainability of cashflows and potential credit risks.
For most individual investors, the most practical approach to investing for income may be to outsource the task to professional managers of income-focussed investment funds. Income-seeking investors nowadays increasingly have options for different risk appetites, as well as single fund solutions that diversify across a range of income-generating assets.
"Investing for income comes in many forms today, so for many investors an approach of combining several income-generating assets can offer a potentially efficient and diversified solution.”
Ray Sharma-Ong, Senior Investment Director
Unique advantages of the Income Plus Strategy
The Income Plus strategy offers a distinctive approach to income investing, seeking a blend of stability, growth, and reliable income. Our cross-asset investment strategy goes beyond relying on any single asset classes for income generation. By tapping into opportunities across equities, fixed income and cash equivalents, we seek to uncover opportunities for both robust income and growth.
Since we prioritise capital preservation and growth, this helps to ensure the initial investment is protected and enhanced without requiring any depletion of the principal (i.e. the original amount invested) to fund payouts. With our focus on generating natural income through earned dividends and interest, we believe this should provide stability and resilience, even in fluctuating interest rate environments.
Supported by our dedicated local team in Singapore, and a globally connected network of investment experts, the Income Plus strategy is designed to deliver consistent, sustainable income while safeguarding long-term wealth.