Anyone who wishes to grow their personal wealth should know the ins and outs of investing for income. Income from investments can come in the form of dividends from shares and coupon interest payments from bonds, which can then be re-invested and compounded, or withdrawn.
Why invest for income?
The goal of investing in bonds, cash, equities and property is aimed at delivering an investment return from both income and capital growth – as well as to allocate money according to current market conditions and projections.
Income from investments for some is a long term goal, while for others its’ a more immediate need – to finance spending or impending retirement, for example.
Income can also be seen as the indicator of a good investment: many investors believe that companies which pay good dividends tend to display good discipline and performance over time. M&G fund manager, Steven Andrew noted that 60% of people who invested with his company choose to reinvest their returns – which can have a powerful compounding effect over a long period of time.
The 2014 Barclays Equity Gilt study, which looks at long-term returns, showed that £100 invested in UK shares in 1945 would be worth £9,347 if dividends had been taken as cash – but would be worth £177,620 if they were reinvested to buy more shares instead.
Things to Consider When Investing for Income
Both shares and bonds are important as parts of an investing for income plan. The combination of both can make for a more solid, durable portfolio – even the best paying companies have bad quarters and years, depending on many economic factors. Interest payments from government and corporate bonds can help balance out and cushion more volatile investments.
Equally important is to dynamically adjust your holdings of shares and bonds to account for future predictions, rather than simply let initial amounts of stock sit. Investors should be sure, therefore, not only to diversify, but also to beware overpaying for bonds.