What is income investing?

Income investing means selecting investments designed to deliver a steady stream of income over a certain period. It's a popular way to chase decent returns - and to potentially beat inflation. There are a number of ways to generate income.






Dividends can be taken as income, or they can also be reinvested. This is a valuable long-term investment strategy because reinvested income is the biggest overall contributor to total returns because of compound interest. This is the term for earning ‘interest on interest’ or more specifically, generating income from previous income. It actually means you can save less for longer and be potentially better off than saving a lot in a short time. Whether you take the income or reinvest it depends on what you are saving for and over what period of time.



Bonds offer a fixed income from money you ‘lend’ to the government or companies who need to raise cash. They come with the promise to give your money back at the end of a fixed period. You can buy directly or through a bond fund. Investing in bonds does carry the risk that the issuer of the bond might not be able to repay either the interest or the original loan amount, meaning they default on the debt. They are also impacted by movements in interest rates, where their value may go down if interest rates rise and vice versa.



Property offers an income through direct investment in a buy-to-let house or flat but also through property funds. In both cases, rents can be raised in line with inflation. The value of real property is generally a matter of a valuer’s opinion. If investing in a property-based fund, it can sometimes be difficult to deal in its units or sell them at a reasonable price. There is also the risk that the information about the properties invested in the fund is unreliable.



An annuity is an income-generating contract sold by an insurance company and usually bought with retirement savings. It guarantees an income for life. However, the level of income provided by annuities depends on the interest rate on bonds issued by the government at the time you purchase the annuity.


Next article: profile of an Income investor

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