Fixed-income investments are any investments that regularly pay out returns to their holders as an income, rather than the returns being reinvested for growth. As the rising costs of living have continued to squeeze the finances of workers and pensioners alike over recent years, the prospect of a secondary income from such investments has become all the more appealing.
Here, we outline the different options for investing for income and the risks you need to consider, whether you're just getting started or looking to build on your knowledge.
1. Bonds and gilts deliver regular interest payments
Gilts are a type of bond that's issued by the UK government. You can invest in gilts directly or via a fund made up of gilts. According to Interactive Investor, the popularity of direct gilts is on the rise, with assets held in direct gilts having increased more than 20-fold since the end of June 2022.
Find out more:2. Some stocks pay regular dividends
Dividend-paying shares can be a good way of boosting your normal income and, unlike bonds and gilts, typically also offer the opportunity for capital growth. But investing directly in shares is usually considered more risky than some other types of investment, and it’s important take all aspects of any asset into account when deciding what to invest in.
Some companies can use promises of tempting dividend pay-outs to sweeten the deal for investors in what might be considered a higher-risk, or less appealing, business model or market environment. For example, one of the highest dividend payers in the FTSE 100 is British American Tobacco. It's seen its dividend pay-out increase 5.2% since 2014, while its share price has dropped 32% over the same period.
What is a share buyback?
A ‘share buyback’ schemes, is when a company buys back some if its own shares, reducing the number of shares held by investors. This means that remaining shareholders get a higher proportional stake in the company, and thus a greater proportion of dividends.
It also showed that analysts expect the amount of dividends paid in 2024 to grow by 1% to £78.6 billion, and then increase by 7% – to £83.9 billion – in 2025.
Find out more:3. Investing in property can generate rental income – but takes work
Investing in rental property is a popular way to generate a secondary income. But this option requires more attention and effort than investing in bonds or stocks and shares.
You’ll also need to spend time becoming familiar with private rental laws and regulations. And, unless you pay an agency, you'll need to find tenants, and be available to deal with both ongoing maintenance and urgent repairs.
Find out more:4. Investing through a stocks and shares Isa can help maximise your income
Most people get a tax-free allowance for each of these, which varies depending on the type of tax and whether you're a basic, higher or additional rate taxpayer. But if you're investing specifically for income, there's a good chance you'll top one or more of the allowance thresholds.
5. Taking an income could reduce the overall value of your investment
Some people take an income from their investments that includes part of its ‘capital value’ (how much the assets would be worth if you sold them), as well as any dividends.
Let's say, for example, you invest £100,000 in assets that pay annual dividends of 3% (equivalent to £3,000), but you need an annual investment income of £5,000. You could choose to also withdraw the extra from the capital value. This would equate to 2% in the first year, and potentially more than this in subsequent years (subject to the investments' performance).
Find out more:6. A good financial adviser can help you manage your investment risk
It’s important to take on the right amount of risk for your financial needs and goals. If you’re interested in taking an income for retirement, for example, it might suit you better to have a slightly lower-risk strategy, so that you don’t unexpectedly lose money you need to live on.
If your situation is fairly straightforward, lower-cost alternatives include digital ‘robo-advisers’ and managed Isas. With these platforms, you'll usually need to answer series of questions to determine your goals and risk appetite. The platform's robo adviser (essentially a clever algorithm) will recommend investments that most closely align with your responses. But there is usually less personalisation, flexibility, and opportunity to ask questions than with a human adviser.
Find out more:source https://www.which.co.uk/news/article/6-tips-to-get-started-investing-for-income-a6kUQ3f3m1md