Investors with longer-term investment objectives often have requirements for regular income and capital growth. The right mix of income and capital growth may depend on whether you need immediate access to your money or you prefer to draw an income and grow your investments over time.
Regardless of your particular needs, income assets play an important role in investment portfolios by providing a stabilising effect during periods of stock market volatility.
So what do you need to consider?
Identify how much income you need – if your income requirements are too high then you might end up with a portfolio which pays a high income, but at the expense of capital growth. An income in excess of 5 per cent is probably unsustainable in the long run. If your primary need is for regular income and you need quick access to your money, you may find that shorter-term income assets, such as fixed interest and cash, are better suited than growth assets. Interestingly, income and capital growth don’t need to be mutually exclusive. Some shares and listed property trusts can provide a tax-efficient income in the form of dividends. The good thing about these assets is that they can also provide growth over time, so your savings can keep ahead of inflation.
Investment time frame you need – usually, the longer your investment time frame, the more aggressive you can be with your investments – although this depends on your appetite for risk. If your time frame is less than five years, investing in shares may not be the best option as shares can be volatile over shorter time periods. It’s important to be aware of the impact inflation can have on the buying power of your capital and income payments. Including growth assets in your portfolio can help your savings to keep up with inflation.
Look after your capital – many income-seeking investors look to maximise income without protecting their capital. A high yield can be a result of recent falls in the share price. This can signal there is something wrong with the business and the dividend might be cut in future. If appropriate, equity income investors should consider looking for companies that can pay a sustainable and growing dividend. This approach is likely to be supportive of the share price.
Diversify your income stream – if you are dependent on income from your investments, it is essential to have a mixture of investments from which the income is derived. Diversification should help to mitigate the impact of events affecting individual companies. Investing in a number of asset classes may help to provide a more stable income – income generated from corporate bonds is generally less volatile than that from equities. Likewise, investing overseas provides a further opportunity for diversification.
Understand your tax position – consider your tax position when investing. Investment income for each asset class is treated differently. We can help ensure that you understand the tax implications of your investments before you invest.
Past performance is not necessarily a guide to the future. The value of investments and the income from them can fall as well as rise as a result of market and currency fluctuations and you may not get back the amount originally invested. Tax assumptions are subject to statutory change and the value of tax relief (if any) will depend upon your individual circumstances.
I am a self employed business consultant and recruiter retained by Truly Independent limited. If anyone wishes to speak with an adviser I can arrange this with a Truly Independent adviser.
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