What is income investing?
Income investing involves structuring your investment portfolio to focus on generating regular, consistent income. There are many different types of investments that can deliver regular income. These include term deposits, investment property, certain shares and bonds.
Many investors use income-focused funds like ETFs (Exchange Traded Funds) to meet their income investment goals.
Explore some income-focused ETFs.
What are the best investments to generate income?
The best investment to generate income depends on your personal goals and risk profile. Income-focused investors typically value investments that are easy to access and can be relied upon to pay a specified amount, regularly.
Bonds are synonymous with income investing because they are relatively low risk compared to shares and pay a fixed amount at regular timeframes. That is, the payment is “fixed”. For example, the payment could be 5% of the value of the bond, paid every month for the life of the bond. Bonds are part of the asset class known as “fixed income”.
Many investors also generate income by buying shares in a company that has a track record of paying its shareholders dividends.
Investors can build a portfolio of dividend-paying companies or bonds by investing directly or via ETFs.
Difference between investing in equities and investing for income
Equities is another way of referring to shares. The main differences between equity and income investing could be the different investment objectives, as well as the levels of risk and expected returns because of those objectives.
Investing in equity markets can be more volatile but often yields bigger rewards for the increased risk. Equity market investors may also be more interested in their shares increasing in value (capital growth) than in producing a consistent flow of income.
Sometimes equity investors seek income, accepting the risk of a loss of capital. This is sometimes called ‘dividend investing’. Dividend investing involves investing in equities but with a particular focus on the regular distribution of a company’s income to shareholders, as opposed to companies that do not pay a dividend. Dividend-paying companies may appeal to certain investors because they may deliver two sources of return: income from the dividends as well as capital appreciation of the stock price.
The objective of investing for income is generally building an investment portfolio that is structured to generate regular income. This can be done via bonds which pay regular coupons or via equities which pay established and regular dividends.
What are dividends?
In terms of share-market companies, a dividend is a share of a company’s profit that is distributed to shareholders. For example, CBA has typically paid out dividends twice a year, with investors receiving $2.15 per share in February and $2.50 per share in August 2024.1 Most firms only pay a part of their earnings in the form of these distributions. Retained earnings are used by a company to invest for future growth.
Do ETFs pay dividends?
Yes. If there are companies that pay dividends in the ETF, or the ETF receives income from its bonds, then the ETF will distribute those dividends or coupon payments to investors. Some ETFs, like ASX: DVDY, focus specifically on ASX-listed companies that pay dividends.
Investors who prefer to grow their investment rather than receive a cash payment have the option of participating in a dividend reinvestment plan (DRP) whereby their dividends are automatically reinvested, awarding the investor additional units in the fund.
Participation in a DRP is voluntary and if an investor does not choose to invest in the plan the cash dividends will be paid to their nominated bank account.