In today’s market uncertainty many Newcastle investors are looking for ways to get income from their investments. While share markets can be rocky, there are many investment options that can give you a steady income stream. Let’s look at them from low risk to those that offer income and growth.
Understanding Income Investing
Income investing is a strategy of getting regular income from your investments, it’s a popular choice for those who want to supplement their income, save for retirement or achieve a specific financial goal. This will give you a steady income stream and reduce your reliance on employment income, and create a more sustainable financial future.
There are many types of income investments to choose from. Dividend paying stocks are a popular choice, they give you regular dividend payments that can give you a steady income stream. Bonds are another option, they give you interest income that can be attractive in a low interest rate environment. Alternative assets like real estate investment trusts (REITs) and master limited partnerships (MLPs) can also give you income and often diversification.
When income investing it’s important to consider your risk tolerance, investment timeframe and the tax implications of your investments. Income investors should be aware of the risks involved, interest rate risk, credit risk and market volatility. By choosing a mix of dividend paying stocks, bonds and alternative assets, you can create a balanced portfolio that suits your financial goals and risk tolerance.
Secure Income Options: Protect Your Capital
If capital preservation is your priority, there are several investment options that can give you income without risking your capital: Fixed interest investments like government and corporate bonds are another option for those who want to protect their capital and get income.
Online Savings Accounts
These accounts offer competitive interest rates because they are digital first. You’ll find higher rates here than traditional savings accounts and 24/7 access to your money. Many providers offer bonus rates for new customers or when you maintain certain balances.
Cash Management Trusts (CMTs)
CMTs pool your money to invest in cash securities, with daily interest calculations. They have minimal entry fees but be aware of management fees. They’re good for cash that’s not needed for daily expenses but more flexible than term deposits. But remember trustees may restrict withdrawals if they think it’s in the best interest of all investors.
Term Deposits
These can offer higher rates than CMTs, but rates have become more competitive with online savings accounts lately. The trade off is your money is locked away for the agreed term and penalties for early withdrawal. Terms range from 3 months to several year,s and interest is paid regularly or at maturity.
Medium Risk Options: Fixed Interest Investments
For those who are comfortable with some market movement,t these options can give you more income:
Fixed Interest Managed Funds
These funds invest in bonds and bank bills, pooling your money to access institutional grade investments. A managed fund can also be used for property investments where the property manager’s skills can impact the income available to investors. They’re often used as the fixed interest component in a diversified portfolio. Fees will vary depending on the underlying investments but may offer a small growth component with income.
Convertible Notes
Issued by companies and trusts, these instruments can offer attractive interest rates. At maturity,y you can choose to convert your investment into company shares or get your capital back. Being exchange traded, their value can move with market interest rates and company performance.
Hybrid Securities
These investments combine debt and equity characteristics. While they can give you good interest payments, their market value can go down if the issuing company underperforms. With long terms (often 50 years), their tradability depends on market demand.
Growth Plus Income: Higher Risk Options
For investors who want both income and growth:
Australian Shares: Dividend Income
Many Australian companies give fully franked dividends, which can give you extra benefits through imputation credits. An equity income fund which focuses on generating income through dividends from established companies can be a good addition to an income focused portfolio. While share prices can move up and down a long term investment horizon can help manage this risk and give you both income and growth.
Property Trusts
Both listed and unlisted property trusts pool your money to buy commercial real estate. They can give you attractive income streams, sometimes with tax benefits through tax free or tax deferred distributions. Listed trusts offer better liquidity through ASX trading while unlisted trusts have longer investment horizons.
Tax Efficiency and Income Investing
Tax efficiency is a key consideration for income investors as it can make a big difference to the net income you get from your investments. Tax efficient investing is about minimising tax liabilities and maximising after tax returns so you keep more of what you earn.
One way to achieve tax efficiency is to invest in tax advantaged accounts such as individual retirement accounts (IRAs) or 401(k) plans. These accounts offer tax benefits such as deductions or credits that can reduce your overall tax bill. Another way is to invest in tax efficient investment vehicles like index funds or exchange traded funds (ETFs), which have lower turnover rates and, therefore, lower capital gains tax.
And don’t forget to consider the tax implications of different types of investment income. For example, dividend income is generally taxed at a lower rate than interest income, so dividend paying stocks may be more tax efficient than bonds. To optimise your income investments for tax efficiency, seek tax advice from a financial adviser or tax professional. We can help you navigate the tax laws and make sure your investment strategy is aligned with your goals.
Risk and Volatility
Managing risk and volatility is key in income investing to get a steady income from your investments. Several strategies can help you manage these challenges, including diversification, asset allocation and hedging.
Diversification is spreading your investments across different asset classes, sectors and geographies to reduce exposure to any one market or sector. This can help reduce risk and increase long term returns. Asset allocation is distributing your investments across different asset classes, such as shares, bonds and alternative assets, to get a balanced portfolio. This can help manage risk and volatility by reducing reliance on any one asset class.
Hedging is another technique that uses financial instruments like derivatives to reduce market risk. For example, options or futures contracts can be used to hedge against interest rate risk or market volatility. Income investors should also be aware of the specific risks of income investing, including interest rate risk, credit risk and market volatility.
Working with a financial adviser or investment professional can help you develop a risk management strategy that is aligned with your investment goals and risk tolerance. We can give you valuable insights and guidance to help you navigate the income investing landscape and keep your portfolio resilient in the ups and downs of the market.
Investing Overseas
Investing overseas can open up a whole world of opportunities for income investors, access to more investment options and potentially higher returns. But it also comes with additional risks such as currency risk, political risk and market volatility.
There are several ways to invest overseas, including buying foreign stocks, bonds and alternative assets. International mutual funds or ETFs can also give you exposure to foreign markets, a convenient way to diversify your portfolio globally. When investing overseas, you need to consider currency risk, which can affect the value of your investments due to exchange rate fluctuations. Political risk and market volatility are also important to consider as changes in government policies or economic conditions can impact foreign investments.
Also, consider the tax implications of international investing, including withholding taxes and foreign tax credits. These can impact your overall returns and should be factored in when developing your investment strategy.
Working with a financial adviser or investment professional can help you navigate the overseas investing landscape. We can help you develop a strategy that is aligned with your investment goals and risk tolerance and keep your portfolio balanced and diversified. Regularly reviewing and adjusting your portfolio is also important to make sure it’s still meeting your investment objectives in an ever changing global market.
Finding Your Mix
For most Newcastle investors the right approach is a balanced portfolio with a combination of these investments tailored to your individual circumstances. The right mix depends on:
- Your income needs
- Your risk tolerance
- Your investment timeframe
- Your tax situation
Next Step
Every person is different, and what works for one person may not work for another. As your local Newcastle financial planners, we can help you work out the right mix of income generating investments for you.
Would you like to discuss your income investment strategy? Contact our Newcastle office to arrange a personalised consultation with one of our experienced financial advisers.
