For many people, achieving income from savings and investments has been a struggle for the better part of ten years. With interest rates at record lows of 0.25%, the interest from cash deposits is negligible and unlikely to improve soon. The search for income is becoming increasingly difficult in an environment of low-interest rates, but that shouldn\’t prevent you from pursuing opportunities.
When hunting for income, don’t be too keen to jump at the highest yielding options on the market. Although initially attractive, some of these can be riskier than they first seem. A higher yield could be generated from an unsustainable investment strategy, or subsidised by unusual cash flows.
Balancing risk with yield in the search for income
Whilst a stock with a yield of 8% or more appears attractive, the high yield could be a signal that professional investors are expecting an upcoming cut. High-yield stocks are also occasionally a sign that the company is underperforming, or has suffered a recent price crash.
Attractive yields can also be found in the fixed income markets, but these returns are often high due to increased risk that the company is unable to sustain interest rates they’re paying. Careful analysis of opportunities and a diversified, long-term strategy are key to success.
In addition, the property markets have been in the news recently, and can also provide a good source of income. Whether commercial or residential, property can provide a reasonably reliable source of income, as well as capital gains opportunities.
Diversifying your portfolio
By building a diversified and balanced portfolio of assets, you can help to mitigate the risks of higher yields. It is also worth your time to examine alternative asset classes such as REITs.
Try to get a good understanding of how investments work before you hand over your cash. The dangers of investing in an area without robust sustainability can quickly cut your returns out from under you. Always make sure you understand the structure of a product and how income is being generated.
If you’re comfortable with investing in more risky asset classes, diversification provides a good measure of stability for your returns. Let\’s say you put all your money were invested in a single company, Money Industries. Money Industries has a good reputation, they\’re growing well and pay a dividend of 5% a year. The longer you hold the shares, the better things get, as they increase in value and the company increases the dividend to 7% thanks to a great year. You continue to add to your holdings, convinced that this is your golden goose.
Sadly, a few years later, an accounting scandal hits the firm. Shareholders panic, slashing the price of the shares and the company halts dividend payments. You rely on those dividends for income and are suddenly left in a bit of a mess. You have no income to pay the bills and can\’t sell the shares without incurring a loss, as they\’re worth a fraction of their original price.
If, however, you balanced your portfolio with two long term bonds, an income generating REIT and a selection of Asian and American shares, the impact of the scandal would be far smaller thanks to the power of diversification.
Winning the search for income
Truthfully, I think those searching for income from savings and investments will continue to have a tough time for many years to come. Interest rates seem unlikely to rise and growth in many countries seems depressed and stagnant with rapidly growing debt piles attached to households, businesses and governments. Despite this, a diversified and well-managed strategy can help to mitigate tough conditions. Seek out the best rates on savings accounts, diversify your equity holdings, and seek out alternative income sources.
As investors widen their search for income, it is important to maintain due diligence whilst incorporating a flexible attitude to risk. Make sure to balance signs of consistency, growth and capital appreciation opportunities to ensure sustainable income over the long run.