Investing for income – in interesting times

The Ancient Chinese expression of displeasure “May You Live in Interesting Times” could well refer to the current economic climate.

The slow recovery from the 2008 global financial meltdown, potential breakup of the European Monetary Union, collapse of Sterling and confusion over Brexit, and low interest rates. These add up to times that are interesting to say the least – especially if you are looking for an income from your investments.

But solutions do still exist.

Low interest rates and inflation

There are many sources of investment income. The most popular include fixed income funds, bonds, property, shares and cash.

Currently low interest rates mean that returns on cash are unexciting. Inflation may be falling, but it is still high enough to reduce the buying power of your deposit. Your money needs to earn 2.1% simply to keep its value.

The returns that are achieved before inflation are called the nominal yield.  Incomes that are achieved after inflation are called the real rate of return. The real rate of return is what you have before you start digging in to your capital.

To achieve a worthwhile real rate of return, you will probably need to look at the other asset classes.

Bonds

Bonds are loans from investors to companies or government bodies. In return the borrower will pay interest, usually once or twice per year, and at a set date in the future, repay the loan in full.

The interest rate a bond pays depends on a number of factors. If the company or government is stable the interest rate will be low, as investors have a high chance of getting their money back. A higher-risk borrower will have to pay more, making returns larger – but with an increased risk of losing your capital.

Interest rates are also affected by prevailing rates. New bonds currently have low rates of interest often just a little more than you could get with a bank deposit. You might need to look at bonds with a riskier profile to get the kind of return you want.

Dividends

When you own a share, you own part of the company that issued it. So, when that company pays a dividend it is paying you a proportion of the profits.  A well-managed company may well be able to deliver excellent dividends, but there is no guarantee. If profits fall, dividends could be reduced, or not paid at all.

Many fast growing companies, including many in the technology sector may not pay dividends at all. They may reinvest profits by hiring new workers or building new facilities rather than paying dividends.  You need to look carefully before buying shares to see what kind of income your shares might achieve – and remember that the low pound has made many shares more expensive to buy.

Property

Owning residential or commercial property can mean capital growth as well as income from rent. Yields will vary across the country – and be whittled down by agent fees, tax, insurance and maintenance. A regular income is possible, but you may need to build up a portfolio of several properties to ensure you are not faced with ‘voids’ when you don’t have a tenant.

Fixed Interest funds

In interesting times, a fixed interest fund might be the simplest solution.  These invest across a portfolio of bonds, spreading the risk while attempting to deliver predictable income. These investments carry more risk than cash, but less than property and shares and bring you the benefits of a professional fund manager. As with any investment, it is important to get advice before making a commitment.

What should you do?

Investing for income is never easy, and a spread of investments may be the most prudent approach. More prudent still might be to get professional help from the Continuum team.

The value of investments, and the income from them, can fall as well as rise and you may get back less than you invested.

Sources:

thisismoney.co.uk – How to invest for income: What you need to know about shares, bonds and why dividends matter – 28th April 2018