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If you’re reading this column, I have to assume you’ve got a pretty good grasp of the pros and cons of investing. You know, putting some money into shares or other investments, earning a decent return each year, retiring early, buying a 200ft superyacht, sailing out to sea never to return. Everyday sort of stuff.
And indeed, as any good finance guru will tell you, investing is a great way to make your money make money, as, when done sensibly, you’ll end up with not only the amount you put in, but a good return on top.
But what about making your money that’s making money make even more money? Now we’re really talking.
Enter income investing, also known as yield investing. This is a strategy where you prioritise investments in your portfolio that generate you a regular, consistent income. These could be things such as bonds, term deposits, investment properties or certain shares/ETFs.
What’s the problem?
It’s a strategy that’s started to gain popularity with younger investors, according to iShares. Investors aged 22 to 45 are most likely to pick income-generating investments as a way to help save towards other goals, such as buying property or retiring early, and iShares found over a third of ETF investors are already invested in specific income-generating funds.
What you can do about it
So if you’re interested in making a bit more money off your money, read on:
- Income-generating shares: When it comes to your traditional share portfolio or exchange-traded fund, most of them are focused on long-term returns, aiming to give you a solid 7 to 10 per cent, per year, over the course of a decade or so. Income-generating shares are a little different, with the focus instead being on shares and other assets that pay regular, and healthy, dividends. In terms of individual shares, we’re talking companies like Fortescue, BHP, Wesfarmers or the big banks, which tend to pay out reliable dividends. “One of the benefits of income ETFs is that investors can receive a more regular stream of income without having to build and manage a portfolio of individual securities themselves,” says BlackRock Australia index investment specialist Tamara Haban-Beer Stats. “They’re also simple and flexible to trade in and out of, and don’t require a large minimum investment amount to get started.” This can make them a more attractive option when compared to other common income-generating investment options such as property or term deposits, she says. It’s worth noting that some income-generating ETFs can have higher fees that your standard ETFs that just track an index or sector, so it’s worth doing your research before you invest. And finally, what you gain in dividend income you will lose in share price appreciation, as many companies who pay high dividends often won’t have great price growth, so keep that in mind.
- Other options: Outside yield-making shares, there are a range of other assets often picked for their ability to generate some form of regular income, including bonds, term deposits and investment property. In our property-obsessed country, investment properties are naturally going to be a popular option, however when it comes to actually making money, Michael Hutton, wealth management partner at HLB Mann Judd, says they might not actually be a great pick. “Residential property tends to have a poor yield, particularly after expenses are paid. Its main aim is to generate a good capital gain – hence all the arguments about taxing capital gains more heavily,” he says. Instead, Hutton says commercial property, either via direct investment or Australian real estate investment trusts (A-REITs), tends to offer higher amounts of regular income. Bonds and term deposits, while offering regular interest payments, tend to also be on the lower side, he says, with rates dependent on the current interest rate climate, meaning an investor might only receive around 5 per cent a year. Cash is also, technically, an income-generating investment, but often the returns you receive may not outpace inflation.
- How much should you have? Like many things in investing, how much of your portfolio you dedicate to these sorts of investments is based on numerous variables, including your risk appetite and stage of life. However, Stats says income investing can work hand-in-hand with more traditional, growth-focused investments. “Income strategies may provide more consistent cash flow, while growth strategies may offer greater upside or outperformance when compared to global markets,” she says. “It’s important to note that for many investors, it’s not necessarily an either-or decision as the two can work alongside each other in a diversified investment portfolio.” In a traditional “balanced” portfolio, such as the ones your super may be invested in, income-generating strategies tend to make up 30 to 40 per cent of the portfolio.
- When are income-generating investments sensible? During times of market exuberance and soaring share prices, income-generating investments can take a back seat as investors tend to chase the higher returns that are available elsewhere. But if uncertain times are ahead (cough cough AI bubble cough), income investing becomes more appealing. “More secure income-based investments are a good hedge in times of uncertainty, and good for the ‘sleep at night’ factor,” Hutton says. “But it is still important to have a substantial allocation to more volatile investments as uncertainty can be good for investment markets.” Finally, with the looming CGT changes set to even the playing field between property and shares, income investing may become a more appealing strategy moving forward.
Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
Dominic Powell is the Money Editor for the Sydney Morning Herald and The Age.Connect via X or email.