Investing for income
What is income investing and how does it work?
Investing for income, or income investing, is an investment strategy focusing on building an investment portfolio structured to generate a regular passive income. Generating income is placed above capital gains, with the income created coming from all or a selection of the individual investments that comprise the portfolio.
Investing for income is a strategy commonly used by people to create a regular income during retirement; however, it is increasingly used by people in all different stages of life as it can provide a supplementary income and help boost savings. Whilst there is no set formula when investing for income, it is essential to consider your financial situation, long-term investment goals and your tolerance to risk.
“A popular strategy for retirees, investing for income is a great way to receive an income when you stop working. However, with a limited number of hours to work each day, it is also a beneficial investment strategy in any stage of life as it allows you to increase your revenue without taking up too much time.” Andrew McVeigh – Managing Partner.
Why is investing for income becoming more important?
With a limited number of years and hours we can work, investing for income is an ideal strategy to grow your wealth and make your money work for you with little effort and time. With people living longer, inflation, less certainty within the global economy, and the rising cost of living ensuring you have enough income in all stages of life is at the forefront of most people’s minds.
In retirement, it is essential to have a level of certainty around your finances, with investing for income providing a passive source of income that provides you with the cash flow and income you need to support your lifestyle and ongoing expenses. Equally, for younger generations, income investing can be an excellent way for people to supplement their regular paycheck with a passive source of income, allowing them to grow their savings without taking high levels of risk.
While investing for income is gaining popularity, many are still unaware of the diverse range of income-generating investments available in the marketplace.
What are the main types of investment income?
Let’s look at the different types of income-generating investments and their associated forms of income. The table below provides a snapshot of various assets that can form part of an investing for income strategy.
| Type of Asset | Income Generated | Description of Income |
|---|---|---|
| Alternative Credit investment funds | Monthly distributions in the form of interest repayments | Monthly interest repayments based on the underlying performance of the fund. |
| Cash, bonds, mortgages, hybrids, term annuities | Interest | A known payment amount that is paid regardless of the underlying investment profit. |
| Property | Rent | Payment made to the investor for the use of their asset. A contractual amount independent of profitability. |
| Stocks, private equity, hybrids | Dividends | Payment made to an investor from profits made by the enterprise that owns the stocks. |
| Equity option funds, structured products | Capital conversion | Some investments use derivatives to partially transform the capital and generate income. A derivative is a contract that gains its value from the performance of an underlying entity (asset, index, etc.) |
| Lifetime annuities, RCVO annuities, Innovative annuity products | Capital consumption | Regular payments generated through drawing from the original investment in addition to earnings. |
Alternative Credit investment funds
When you buy into an alternative credit investment fund, you buy into an investment with a pool of assets such as personal loans, car loans, trade, business, real estate and specialty finance products. This type of investment provides regular monthly distributions in the form of interest repayments with the added benefit of offering investors the option to reinvest and further increase their wealth.
Typically, alternative credit investment funds are consistent and reliable investments that are actively managed and designed to beat market returns. Unlike many traditional fixed-income investments such as bonds and EFTs, most alternative investment funds have floating rates, offering investor protection in an environment of rising interest rates. They also have a low correlation to other income-generating assets, such as shares, which helps to aid portfolio diversification and assists investors in safeguarding their portfolios. If one market (e.g., bonds or shares) is volatile, investing money in alternative assets such as a credit fund as part of an investing for income strategy can help offset any losses and provide a more reliable income stream.
Remara has two alternative credit investment funds designed to sit within an investing-for-income strategy. The first option is our flagship Private Credit Income Fund. Specifically designed for investors looking for a regular income stream, the fund offers monthly distributions and quarterly withdrawals and has returned 13.40% (after fees) over the past 12 months to investors. It is open to wholesale and retail investors; it suits investors with a medium-risk profile and a minimum investment of only $10,000.
Our Credit Opportunities Fund could be the ideal solution for wholesale investors willing to accept a higher level of risk and looking to add a growth fund to their investment portfolio. With a target of RBA Cash Rate + 10% (post fees) per annum, it offers a high risk-adjusted return and long-term capital growth with the added benefit of monthly distributions for those seeking regular income. Both funds also have an option to reinvest.
Dividend stocks
When you purchase a share, you are buying a piece of that company and, therefore, becoming a shareholder within the company. When a company produces revenue, it sometimes returns a share of the profits to shareholders through dividend payments. It is the company’s way of rewarding shareholders for investing in the company. Not all companies pay dividends, so if you are looking for dividend stocks, you need to purchase your shareholdings carefully to ensure the company you buy into offers this benefit.
Bonds
Bonds are an asset created when a government entity or company needs to raise capital. Investors purchase bonds in the form of debt, with the promise of receiving interest payments and repayment of the principal amount over a specific timeframe. Also referred to as fixed-income investments, bonds, especially government bonds, have a lower risk than other assets such as shares and are often used to add portfolio diversification and reduce volatility. Non-government bonds are slightly riskier but frequently come with higher returns.
Money market/ cash management accounts
An attractive option for investors who need quick access to their cash and still want to receive monthly interest payments, money market or cash management funds are an excellent way to generate modest returns so that your money is never idle for too long. Usually, requiring you to maintain a minimum balance of money, market accounts can form an essential part of your overall financial portfolio. While they don’t generate significant income, they provide quick access to cash and increased levels of stability.
Real estate
The most common way that most Australians invest for income through property is by purchasing a residential or commercial property and renting it out. However, investing for income through real estate can be achieved in several ways, including Real Estate Investment Trusts or REITs.
Mutual funds and EFTS
Mutual funds and EFTS are types of pooled investments that hold several different assets like bonds, stocks, REIT’s and other alternative investments that can provide a consistent income stream. Some mutual funds and EFTS invest in stocks that pay dividends, whilst others focus on stocks with a high yield.
Pros and cons of investing for income
As with any investment strategy, there are always pros and cons.
Pros of investing for income
Income
The main benefit of investing for income is the ongoing revenue generated. For retirees, this can supplement other income sources, whilst for those still working, it can help them build wealth further and supplement their regular pay.
Portfolio diversification and reduced volatility
Certain income-generating investments can add a significant level of portfolio diversification. For example, choosing an alternative investment fund with a low correlation to public markets can give investors a more balanced overall return. The underlying investments in these types of funds rely less on market trends and more on the strength of the fund’s individual investments, which in turn reduces risk.
Predictability of returns
Many income-generating assets offer predictable returns based on the interest rate charged, allowing investors to forecast their cash flow.
Opportunities for capital appreciation
Mutual funds, stocks, bonds, EFTS and some alternative funds can also appreciate in addition to the income they generate. Often, there is also the option to reinvest the income earned if you don’t need it at that point in time.
Cons of investing for income
Fluctuations in returns
Interest repayments and dividend payments can fluctuate with market shifts.
Investment risk
With any investment, there is always some level of risk. Knowing your risk tolerance is essential before investing in any asset. Balancing lower-risk assets with higher-risk ones can help mitigate loss.
Income for investing: Example portfolio allocations
There are numerous examples of how to build a portfolio for income investing. Below are three examples of what investors might consider using a mixture of Remara funds.
Conservative portfolio for income investing
| Asset Type | Fund | Allocation |
|---|---|---|
| Alternative Credit Investment Fund | Cash management 'At Call’ account | 0-100% |
| Alternative Credit Investment Fund | Term 6-month account | 5% - 50% |
| Alternative Credit Investment Fund | Term 12-month account | 5% - 25% |
Balanced portfolio for income investing
| Asset Type | Fund | Allocation |
|---|---|---|
| Alternative Credit Investment Fund | Private Credit Income Fund | 5% - 10% |
| Alternative Credit Investment Fund | Term 12-month account | 5% - 25% |
| Alternative Credit Investment Fund | Opportunistic Credit Fund | 2.5% - 7.5% |
Growth portfolio for income investing
| Asset Type | Fund | Allocation |
|---|---|---|
| Alternative Credit Investment Fund | Private Credit Income Fund | 7.5% - 12.5% |
| Alternative Credit Investment Fund | Opportunistic Credit Fund | 5% - 10% |
Key takeaways when investing for income
Investing for income can be beneficial at any point in your life. An important thing to remember is that you can have an investment portfolio solely focused on generating income or a portfolio focused on income and capital growth. You can even have a portfolio focused on achieving both. There is no one-size-fits-all approach. The choice is yours.
If you want to develop your investing for income strategy, contact our team today to learn more about how our funds may suit your requirements.
