Investment portfolios tend to have two major life stages. The first, usually the longer, is that of value being built. The second stage is usually the eventual aim of what that value is being built for – to provide a regular income. Sometimes a larger windfall can also be invested immediately to provide an income.
So, what are some of the options regarding where to invest money for those whose aim is to get a monthly income? Here are 5 ideas:
1.) Regular Income Funds
While most funds pay out dividends to investors once or twice a year, there is a category of monthly income funds which pay out monthly. These payments will still vary depending upon the fund’s current performance but in most cases the aim is for the fund to pay out 11 roughly equal monthly payments and a 12th that is, performance permitting, considerably higher.
However, because managers of monthly income funds will try to focus on investment classes that also provide a steady flow of income into the fund to meet those payments, their options are restricted. As a result, overall annual returns are on average lower than those of other income funds that pay out less regularly and can take a less constrained approach to what they invest in.
2.) Standard Income Funds
While unlikely to lead to quite as stable a regular monthly income, a portfolio of standard income funds will most likely provide a higher overall level of income than monthly income funds. However, because different funds tend to pay out dividends during different months of the year, it is possible to look at historical data of when that usually is. A portfolio of income funds can then be created to provide a spread of reasonably regular dividend instalments over the course of a year.
Annuities are an insurance product that can be bought for a cash lump sum which then pay out a regular income, which is most commonly for a fixed value. They are usually bought for all or part of the value of an investment pot when the holder reaches retirement age and wishes to guarantee a regular income. Annuities can bought for a certain number of years or as ‘lifetime’ annuities, with the holder receiving a fixed income for life. In the case of lifetime annuities, the longer the life expectancy of the holder the lower the value of the regular income which will be offered.
The attraction of annuities is that the holder is guaranteed a particular level of regular income for a guaranteed period of time. The disadvantage is that because the annuity provider guarantees the holder a regular fixed income, regardless of what they are able to actually achieve through the investment of the purchase price of the annuity, they come at a premium price compared to if the holder had invested the same value in their own income-generating investments.
Bonds are also a good income-generating investment. A bond is a loan to a company or government, with the issuer, the borrower, agreeing to pay the holder a fixed interest rate, called the ‘coupon’ over a fixed period of time. At the end of that period the bond holder also receives back their initial investment value.
Bond coupons vary depending upon the perceived risk of whether the issuer will be able to meet their repayment commitment. Government bonds issued by the UK or USA, for example, will pay a relatively smaller interest rate due to the perceived safety of the issuer. Corporate bonds, those issued by companies, generally pay higher returns than government bonds though, again, bonds issued by big, stable companies will pay out less than those from smaller companies perceived as riskier.
Bond coupons are usually paid either bi-annually, tri-annually or quarterly. As with a portfolio of income funds, an investor can choose bonds that pay their coupon on different months to generate a monthly income.
Property investments can also provide a good regular income through rental returns if the mortgage has been paid off, or is considerably smaller than the monthly rent achieved. The downside of an income from property investment is that, unlike the other options mentioned, it is a hands-on investment and requires a degree on input from the owner which could be inconvenient, especially for older investors.
There are property management companies that can take on part or all of the hand-on elements to renting out an investment property, however, using this kind of service would also seriously impact on the rental return.
This article is for information purposes only.
Please remember that financial investments may rise or fall and past performance does not guarantee future performance in respect of income or capital growth; you may not get back the amount you invested.
There is no obligation to purchase anything but, if you decide to do so, you are strongly advised to consult a professional adviser before making any investment decisions.