3 Ways to Approach Income Investing

Some people invest to grow their wealth, others are saving for retirement and then there are those who are looking for an additional income stream. If you are interested in investing for income, here are a few options that could be worth exploring.

1)     Dividend-paying stocks

A popular choice amongst some investors is to invest in dividend-paying stocks. Fortunately, many ASX-listed stocks offer dividends to their shareholders, which are typically paid biannually. So, while finding a dividend-paying stock is generally straightforward, the difficulty lies in deciding on one to invest in. The amount shareholders receive as a dividend is directly linked to the earnings of the company – when earnings fall, generally so do the dividends. So, it’s important to consider the fundamentals of a company before you invest.

The dividend-payout ratio

The dividend-payout ratio can be a useful tool to help you narrow down which stock to invest in. This ratio calculates the percentage of a company’s earning that is paid out in dividends. To do this, take the total dividends paid out yearly and divide it by the annual net income of the company.

This is used to indicate the percentage of the company’s earning that is being paid to shareholders and how much is reinvested back into the company. It can help to determine if the amount a company is paying out in dividends is appropriate and sustainable. Often, larger and more established companies will have a higher dividend-payout ratio, whereas smaller and newer companies will have a lower dividend-payout ratio.

Investing in dividend paying stocks

The downside to dividend-paying stocks

Apart from shares typically being a riskier investment, dividend-paying stocks shouldn’t be relied upon as a steady income stream. Companies are not obliged to pay dividends and can decide to lower or eliminate them altogether, at any point.

Considering online share trading? The table below displays a snapshot of online share trading platforms on Canstar’s database, sorted by star rating (highest to lowest) and with links to providers’ websites. Please note the Star Ratings are based on the casual investor profile (average of 2 trades per month). Always ensure you read the PDS before selecting a online share trading provider. 

2)     Bonds – A fixed income security

Although, they are not without risk, bonds will generally provide investors with a steady income stream. When investors invest in bonds, they are loaning their money to a corporation or government and in return should receive regular and fixed payments/interest for the duration of the loan.

How much investors receive from their bond depends on the level of risk they are willing to take. More risk undertaken often leads to higher returns. When assessing the riskiness of this fixed-interest asset, consider the duration of the loan as well as the loan issuer. For example, the longer you hold the bond the higher the risk, and bonds issued by the government will generally also be a safer option than corporate bonds.

How to access bonds

When a bond is first issued you can purchase it directly from the company, afterwards, they are listed on the secondary market where investors can buy and sell their bonds. You can also buy and sell exchange-traded bonds (XTBs) and exchange-traded indexed bonds on the ASX, just like shares.

3)     Property

You’ve likely heard the stories of property investors who retired comfortably at 35, living off the rental income and equity of their properties. While lucky few have found that to be the case, investing in property is often harder than you think. It can also require a lot more work compared to other income-generating investments.

Looking for an investment property
Looking for a house can be quite time-consuming. Source: Monkey Business Images (Shutterstock)

Firstly, saving up for a deposit can take years, then finding the right property can also be fairly time-consuming and will require thorough research. Once that’s done, you’ll need to secure reliable and, preferably, long-term tenants. There is also insurance to consider and the on-going maintenance of the property. Finally, those with an investment property are also at the mercy of the property market, which can be quite volatile.

Although a high maintenance option, investors who do their research, buy in the right area and sell at the right time, can do well for themselves.

REITs

If you are interested in investing in property but looking for an option that is more ‘hands-off’, real estate investment trusts (REITs) could be worth exploring. Similar to managed funds, REITs (A-REITs in Australia) are actively managed and pool funds from various investors to invest in properties. Through REITs, investors are able to earn a share of the income generated by tenants and capital growth, without having to purchase the physical property. REITs can be a good option for those who don’t have the funds necessary for a deposit (you can invest with as little as $500), and the upkeep of the property is generally taken care of, as well.

So, which option suits you?

Before you decide on what to invest in, or if income investing is right for you, here are a few things to consider:

  • How much risk are you willing to take?
  • How much income do you need to make?
  • How much do you have to invest?

Answering these questions could help you determine which approach suits you. You might find one option is a better fit than the others, or it might be a mix of all three.

Make sure you thoroughly read the PDS before making an investment decision.

Cover image: Mintr (Shutterstock)

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