A guide to investing for income and where to find it

Starting your own business and being your own boss can be all-consuming. Your energies are focused on growing your company – carefully allocating resources, diligently tracking expenses and cash flow, looking for cost-effective solutions, and prioritising investments that yield the highest returns. There seems to be little time for anything else.

But as you build your empire, it’s important not to neglect other areas of your finances – namely your pension and savings. And when it comes to our personal investments high yielding assets can also be a good strategy. Because if you can generate an income from your investment portfolio it can fulfil a number of roles.

For example, it can be used to supplement your regular income or fill any gaps (like the holiday pay the self-employed don’t get to enjoy). It can also be reinvested any time you don’t need it to help compound your total returns over time.

So, what do you need to know about income investing and what options are there?

Investing for income 

Lots of different types of investment can generate an income.

The first is cash. With interest rates now well above the ‘emergency levels’ we were used to in the 2010s, this is a good place to put your savings buffer or emergency fund – money you might need to get hold of quickly if the boiler breaks down or you need a new van for deliveries.

Another option is buying shares in individual companies that have the potential to pay out a share of the profits – known as dividends – to shareholders.

Bonds, meanwhile, offer a fixed income in exchange for you ‘lending’ money to governments or companies in need of your cash. Just as you might need a loan to expand your business, so do other firms. As well as the sum lent being returned at an agreed future date, investors will also receive interest payments on the original loan amount.

Another income investing option is property – either actual bricks and mortar that can be rented out to generate an income or investing in property-related shares or real estate investment trusts.

Or you could invest in a fund that pools the money of many different investors and invests it in some or all these assets on your behalf.

How much income should you be aiming for? 

There is no right or wrong answer to this. Some people refer a growing income, others – especially those that want to make use of it straight away – prefer a high income.

The choice is yours, but there is one figure that is worth bearing in mind: 4%.

In 1994, William Bengen, a financial adviser in the US, embarked on an extensive study of historical market returns, focusing on turbulent periods like the 1930s and early 1970s. What he discovered was eye-opening.

Even when factoring in the most challenging market conditions, he couldn’t find a single historical case where a 4% annual withdrawal depleted an investment portfolio in less than 33 years. In other words, you could have taken 4% out each year and your original pot of money would have still been intact more than three decades later.

Now, it’s essential to understand that the 4% rule isn’t a magical solution applicable to everyone. There are numerous variables at play, unique to each individual’s circumstances. Nevertheless, it serves as a valuable starting point for those investing for income and relying on that money to cover their expenses.

Moreover, the 4% rule is worth considering if you’re aiming to build an investment portfolio that generates natural income. If your portfolio can consistently yield 4% each year, you won’t need to touch your capital, providing a sense of financial stability.

10 funds yielding 4% or more* 

1. M&G Emerging Markets Bond: yield 6.57%*

This fund invests in both government and corporate bonds across emerging markets. These bonds can be denominated in local currencies or in the US dollar. Emerging markets are generally seen as being riskier then developed markets so the yield on these investments tends to be higher to compensate investors for the extra risk they are taking.

2. VT Momentum Diversified Income: yield 5.37%*

This multi-asset fund aims to generate a high level of regular income while preserving the real value of capital over the long term. Its managers employ a value-focused investment approach and have the flexibility to allocate investments across various asset classes including UK and overseas equities, fixed income, property, and specialist investments.

3. CT MM Navigator Distribution: yield 5.30%*

This is a multi-manager, multi-asset portfolio, which generally contains between 25 and 35 individual funds, balancing diversification and risk. The managers are targeting a yield that puts the fund in the top 10% of income generators in its sector and this income is distributed on a quarterly basis.

4. IFSL Marlborough Multi Cap Income: yield 5.25%*

This fund invests in the shares of UK companies of all shapes and sizes, but tends to have a bias towards smaller firms. It blends both ‘value’ and ‘growth’ holdings, creating a balanced and diversified investment mix with the potential upside of growth companies as well as the stability and income provided by value-oriented investments.

5. Schroder Income: yield 5.16%*

This fund invests in UK companies valued at less than their true worth and waits for a correction. It has little correlation with other UK equity income funds, tending to avoid the big income producers in favour of more niche names, where both capital and income have the potential grow significantly.

6. The City of London Investment Trust: yield 5.01%*

This is one of the longest-running investment trusts in the UK. It aims to provide growth in income and capital by investing predominantly in larger UK companies with international exposure. It has increased its dividend payment every year for the past 56 years and has been run by the same manager for more than three decades.

7. GAM Star Credit Opportunities: yield 4.80%*

This bond fund is designed to deliver high income returns by investing in the “junior debt” of investment grade companies. This approach enables the fund to generate a substantial income stream while maintaining a high-quality portfolio. It is heavily invested in the debt of financial companies, as this is where its managers believe the best opportunities often lie.

8. Rathbone Ethical Bond: 4.80%*

This fund invests in quality investment grade bonds looking for a competitive income whilst generating attractive total returns. Ethical exclusions are simple: no mining, arms, gambling, pornography, animal testing, nuclear power, alcohol, or tobacco. All positions must also have at least one positive environmental, social, or corporate governance quality.

9. TIME: Commercial Long Income: 4.47%*

This property fund aims to provide a secure and stable investment return primarily through acquiring commercial freehold ground rents and commercial freehold property (known as ‘long income property’), which benefit from long leases. The fund targets an income return of 4% per annum and capital growth.

10. Baillie Gifford Strategic Bond: 4.30%*

This fund offers investors the opportunity to invest in a focused portfolio consisting of predominantly UK fixed income securities in both the investment-grade and high-yield segments of the market. Its managers add value through their exceptional stock-picking skills rather than relying heavily on managing interest rate exposure.

Just as prioritising investments that yield the highest returns can be a successful strategy for a startup business, investing for income is a powerful tool that, when used wisely, can provide financial security. Keep in mind that personal financial planning requires careful consideration and expert advice, but the 4% rule can be a useful tool on your journey towards a sustainable income stream.

*Source: FE Analytics, 1 June 2023