These can range from providing for specific out-goings such as school fees, allowing us to enjoy retirement, or as is currently the case, simply supplementing our existing income flow to manage the impact of inflation and the increasing cost of living.
The income investor isn’t generally looking for the next ‘hot stock’ but is rather more focussed on investments which pay out a solid income stream, often with less volatility.
Government and Corporate Bonds are often seen as the corner stone of an income portfolio, offering a regular fixed payment, over a set period of time, at what is generally deemed to be a lower risk than equities. However, in recent years market conditions have driven down returns and with a fixed income at the outset there is little protection against inflation.
Equities offer an income stream in the form of dividend payments. Unlike bonds, these are not guaranteed, however there are a large number of investible companies with strong track records of not only paying out a regular dividend but also growing these pay-outs year on year.
Property Trusts (Real Estate Investment Trusts) offer access to diversified portfolios of property assets. These Trusts must pay out at least 90% of their taxable income, generated primary from rents to shareholders. Rents generally rise in an inflationary environment and as a result, shareholders benefit from a steady income stream with a built-in measure of inflation protection.
No one asset class offers the perfect solution. However, the construction of a diversified portfolio including exposure to all of these classes allows the flexibility to manage asset allocation, based on underlying client requirements and risk profile, whilst also taking into account overarching macro-economic conditions.
The resultant portfolio provides a sustainable and proven way to generate income without necessarily eating into capital.