Whether you are retired, or perhaps in need of extra cash to support the kids, your investments can play a role in helping you with a regular source of income. There is a range of ways to access income, from directly in bonds or equities to using products like managed funds that invest on your behalf.
When planning to use your investments for income, there are many things to consider.
- The income you are seeking.
- Whether you still need to generate growth from your investments (and therefore may consider only allocating a portion of your investment to income-generating investments).
- The level of risk you can afford to take, which may vary based on your stage of life, the value of your investments, your lifestyle or even your personal preferences.
Some investors might consider using a financial adviser to help them with these questions and the options that might suit them.
A world of options
Fixed interest is one of the traditional tools people use for investment income and can be as simple as using a bank’s term deposit, to something more sophisticated, such as using Corporate or Government bonds. Other popular income options include shares or real estate investment trusts (REITs) which invest in a variety of commercial and industrial properties, both domestically and overseas. Some people also consider using products that include a mix of these different options, but are managed by professionals on their behalf. Some of the different investments you can use for income are covered below.
A traditional bank account offers interest payments on your money, which you could use as an income. Many institutions also offer higher interest rate accounts when you invest for an agreed period of time (like a term deposit) or add specified amounts to your balance each month. Whether this type of account would work for you as an income tool will be influenced by your balance and income needs.
Many bonds provide regular yield payments, which can be based on a fixed interest rate or on a floating rate which periodically resets to market value until the bond matures at which time the original value of the bond is returned to you (pending any risks which may mean you don’t receive your money back, or only receive a portion of it back).
Bonds can be issued by governments or by corporations and can range in quality and risk. In a country like Australia where there is a strong regulatory environment and a reasonably stable economy, government bonds are generally viewed as being the highest quality and most secure. The quality and risk involved in using corporate bonds tends to reflect the quality of each company issuing them. Another thing to consider when using bonds is whether you think you might need to sell them before they reach maturity, as you might not necessarily receive back the full value of your original investment, depending on the market environment at the time.
Investing in shares that offer a consistent dividend stream can offer a source of income for investors willing to take on more risk in their portfolio. With interest rates globally at historical lows, dividends may offer higher returns compared to fixed interest payments on bonds, although this will depend on the company. Not all company shares offer dividends as some may choose to reinvest their profit into continued development of their business instead. Dividends can also vary within the one company over time, depending on its performance and outlook. Shares as a whole tend to be a riskier investment than fixed interest given prices typically move with the market as well as with the performance of each company, so there is also the potential for loss of capital and its suitability will depend on your individual needs.
Listed property (also known as Real Estate Investment Trusts (REITs))
Some REITs offer dividends and these tend to be like shares in terms of variation across the level of risk involved or the potential dividend payments that may be on offer. As with shares, there is still the potential for loss of capital so your individual needs will influence whether this is appropriate for you.
If investing directly is not for you, there are also products that can invest across any of these options on your behalf and target an income stream such as annuities, managed funds, managed accounts or managed portfolios. For example, managed funds, managed accounts or managed portfolios might offer some growth of capital along with targeting income. Using these products may be suitable for those preferring not to manage and monitor their individual investments and seeking diversification across assets with a lower capital balance.
Whatever your income needs, there are a variety of ways to invest for income beyond those specifically covered in this article and choosing the right option will depend on your individual circumstances.
This document has been created by Westpac Financial Services Limited (ABN 20 000 241 127, AFSL 233716). This document provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such. The tax position described is a general statement and is for guidance only. It has not been prepared by a registered tax agent. It does not constitute tax advice and is based on current tax laws and our interpretation. Your individual situation may differ and you should seek independent professional tax advice. This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. Projections are predictive in character. Whilst every effort has been taken to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The results ultimately achieved may differ materially from these projections. Past performance is not a reliable indicator of future performance. Information current as at 30 September 2017. © Westpac Financial Services Limited 2017