Investing for income
Regardless of what stage you are in life, a steady and reliable income stream can assist in supplementing either your current lifestyle or funding your retirement.
There are a number of investment alternatives that can assist in generating additional income ranging from cash accounts, property investments, shares and other high yielding products.
Regardless of what investment you choose, the key to generating a suitable income is to ensure that the investment at least keeps pace with, or exceeds, inflation.
In addition to providing a steady and reliable income stream, many investments can also provide the opportunity for capital growth (which is an increase in the capital or underlying value of your investment); however this should be a secondary consideration for investors primarily looking for a steady and reliable income stream.
Typical investment life cycle
The importance of diversification
When looking at income generating investments, it is important that you remember one of the golden rules of investing - don't put all your eggs in one basket.
If you currently hold most of your investments in term deposits and bonds, although safe and reliable, you may be missing out on tax advantages such as franking credits that are available through shares.
Direct property on the other hand, can provide steady rental income and tax breaks through negative gearing, however you need to consider outgoings such as rates and repair bills. You also need think about the time it could take to sell the property if you needed to exit in a hurry.
Drawing a tax-effective income stream from listed products
There are a wide range of investments available on ASX that can provide you with opportunities to generate income that is both reliable and tax-effective.
By selecting an investment on ASX, you also have the flexibility to change your investments or re-weight your portfolio, as you are able to sell your investment quickly on-market and receive your funds in three days.
So what investment options are available?
ASX income generating investments can be split into four broad categories:
|Investment Option||Investment Overview||Examples||Approximate Yield||Payment frequency||Opportunity for Capital Growth||Eligible for SMSFs|
|High-Yielding Shares||Investments in companies that pay fully-franked dividends. Tend to be 'blue-chip' companies or companies that have a long history of returning income to shareholders.||Blue-chip shares such as banks||3% - 7%||Semi-annually||Yes||Yes|
|Listed Managed Investments||Portfolio of professionally managed assets that are listed on ASX. Diversification benefits provided through pooling of assets and investor funds.||Listed Property Trusts, Infrastructure Funds & Listed Investment Companies||5% - 10%||Semi- annually or quarterly||Yes||Yes|
|Instalments||An investment product that allows investors to purchase, for a fraction of the price (usually between 30-50%), an interest in an underlying blue chip share. Investors are also entitled to receive full dividends and franking credits. Gearing is applied.||Instalments over high-yielding shares and Exchange Traded Funds (ETFs)||7% - 15%||Semi-annually||Yes, leverage can increase capital growth||Yes, if purchased on-market|
|Interest Rate Securities||Investor loans a company money and this money will be repaid to the investor at maturity. As an incentive a fixed or variable rate of interest will be paid to the investor throughout the life of the loan.||Bonds, Hybrids, Convertible Notes||5% - 10%||Quarterly, semi-annually or yearly||Limited||Yes|
When combined, they can all form part of a diversified and tax-effective investment portfolio.
Taking fees into account
With managed investments, it is always important to consider how fees can impact long-term investment returns. In many cases, management fees will be applied when a professional manager is appointed to manage a group of assets on behalf of investors.
Listed Managed Investments (LMIs) attract management fees, however they are often considerably less than their unlisted counterparts (ie - 0.50% - 1.00% for ASX listed funds compared to 1.00% to 2.50% for unlisted funds).
You also should consider the cost of buying and selling. Brokerage costs are applicable when buying or selling on the ASX, while entry and exit fees may apply when making an investment in an unlisted fund.
As with most investment products, market risk and changes to interest rates can impact your investments performance.
Information provided is for educational purposes and does not constitute financial product advice. You should obtain independent advice from an Australian financial services licensee before making any financial decisions. Although ASX has made every effort to ensure the accuracy of the information as at the date of publication, ASX does not give any warranty or representation as to the accuracy, reliability or completeness of the information. To the extent permitted by law, ASX and its employees, officers and contractors shall not be liable for any loss or damage arising in any way (including by way of negligence) from or in connection with any information provided or omitted or from any one acting or refraining to act in reliance on this information.