How can I boost my investment income?
The old strategy of putting your life savings in a term deposit just won’t cut it!
Thankfully, there are ways that you can design a portfolio of investments to give you more passive income that you can live on.
The art of designing that portfolio – called income investing – is to accumulate a collection of assets such as stocks, bonds, investment funds, and property that will deliver the highest possible annual income at the lowest possible risk.
Below, we look at a few techniques that are worth considering to boost your investment income.
Be sure to get professional independent financial and taxation advice tailored to your individual circumstances before making any investments.
Consider dividend stocks
Some companies reinvest their profits into their business to fund growth. Others pay most of their profits out to shareholders. Shares in companies that pay out more than average are called “dividend stocks” and they are a good place to start looking.
Dividend stocks give you at least three benefits:
Above average income
The continued prospect of capital gains as the value of the shares may rise (or fall)
Some protection against price declines because high dividends are attractive to investors
While dividend stocks have clear benefits, it is worth noting that a stock isn't worth owning just because it has a high dividend yield. Sometimes, a high yield may be a sign of weakness. For instance, if the stock’s value has recently fallen a lot due to concerns about the health of the company, this can temporarily increase the dividend yield. However, if the company really is having trouble, the dividend will eventually need to be cut.
This means that just like any company you invest in, you need to thoroughly research high-dividend firms before you buy shares in them.
One way to protect yourself against this type of problem is to buy shares in a high-yield Exchange Traded Fund (ETF). This way you diversify among high-yielding stocks and are less exposed to any one company.
Cut investment expenses
Increasing earnings isn’t the only way to boost the amount of investment income you receive. You can also get more money in your hand by cutting your investment expenses. One way to do this is by using a low cost stockbroker.
While the saving might seem small with each transaction, if you trade a lot the fees can really add up. To save fees on brokerage, the best option is typically an online broker.
The largest and cheapest online brokers in Australia include all of the major banks, and platforms such as CMC Markets.
Consider minimising trading transactions
Regardless of the types of asset you are investing in, one of the best ways to reduce investment expenses is to minimise your trading. Shares, bonds, and property all incur brokerage and other transaction costs. If you want your portfolio to provide greater investment income, try to stick with your investment choices on a long-term basis.
To be successful with a long-term approach, you will need to have a carefully-considered investment strategy so you aren’t constantly trading in response to each piece of good or bad news that comes along.
Consider non-traditional investments
In recent years, many investors have become extremely focused on shares. But there are a number of income investments outside the stock market and now is a good time to explore potential opportunities.
As well as helping you to find income sources for your portfolio, this will contribute to diversification which is one of the key pillars of prudent investing.
Income focused alternative investments include:
Bonds are often viewed as the cornerstone of income investing because their value is less volatile than shares. With a bond, you are lending money to the company or government that issues it. With a stock, you are buying a piece of the business. The potential capital gain from bonds is much more limited but, in the event of bankruptcy, you have a better chance of getting your investment back.
Bonds are less risky than stocks but it is important to remember they are not risk-free.
The old adage about bonds is that you should have the same percentage of bonds in your portfolio as your age. If you are 25, have 25% bonds, if you are 70, then have 70% bonds.
Residential Mortgage Backed Securities (RMBS) are a type of Note or Bond that is secured against a pool of residential mortgages.
These bonds are normally the exclusive preserve of institutional investors but you can get access to them through Firstmac’s High Livez fund.
The fund owns a portfolio of RMBS issued by some of Australia’s largest and most trusted financial institution, as well as some bank deposits.
For more information on High Livez, please go here.