- Your investment portfolio can help you boost your income
- Our comprehensive guide runs through all the ways you can generate income from your investments
Many people manage their investment portfolio with the goal of generating an income. But when bank savings rates are low, this is notoriously difficult to achieve. Fortunately there are other places where you can put your money which have the potential of offering you better rates.
Dividends - earnt through direct equity investment or via funds - are not the only way of generating an income from your investments. In this guide, Mary McDougall provides an overview of all the methods of investing for income and explains when investors might use them.
Don't rely solely on dividends
Brits love dividends. That's hardly surprising given the contribution dividends and buybacks have made to the performance of the FTSE in the last few years.
Companies that pay generous dividends tend to command high valuations, especially when those dividends are well covered by cash and earnings. But in times of financial turmoil, dividend income can come under pressure, causing problems for investors who invest directly in companies or via funds and investment trusts.
Just over a third of FTSE 100 companies have trimmed their dividends so far in 2020 and, by the end of the current financial year, a further 46 cuts are expected to have been made. For investors hanging onto the illusion that their precious income might bounce back as the coronavirus pandemic passes, Factset’s consensus dividend forecasts – compiled and analysed by the Investors Chronicle – do not offer much hope.
Investment trusts can top up their dividend payments using revenue reserves, but even these could come under pressure amid a prolonged income slump. So it is worth carefully monitoring how funds you hold or are thinking of investing in are holding up?
Consider interest and tax
Investors should look at broader market trends when assessing the outlook for their income. Monetary and fiscal policy have a big impact on fixed income investments including corporate and government bonds as well as interest rates provided by banks.
There are also tax implications to consider, as explored in the article below.
If investing for income appears to be under threat, an alternative approach is to instead build a diversified portfolio that targets total returns, taking capital gains when required. However, the Treasury could soon throw a spanner in the works for budding total return investors as chancellor Rishi Sunak has proposed a review into CGT.
Inflation has been on the retreat for more than 30 years with the odds seemingly stacked against it returning. From ageing populations to the displacement of workers by new technology, numerous structural trends have stood in the way of a major uptick in prices. In the shorter term, this year's mass economic shutdown should be deeply deflationary.
The fiscal and monetary response to the coronavirus crisis has been huge. Governments have pumped billions into the economy and central banks are keeping monetary policy extremely loose, so some of the worst economic effects of the lockdown may have been averted. But such extreme measures have consequences.