As family and friends gather to celebrate the Lunar New Year, an auspicious greeting that is often exchanged is “财源滚滚”, which loosely translates to “rolling prosperity”. Although some people associate this with a sudden windfall, achieving “rolling prosperity” can be as straightforward as investing for income.
When you invest for income, you are generating steady cashflow outside of your monthly salary. The extra income earned can be used to offset your monthly expenses, save for your child’s education, or fund your retirement. Simply put, income investing is a strategy that almost any investor can use to enjoy prosperity in the new year.
What is income investing?
Income investing involves investing in assets that can provide you with regular income - often in the form of interest or dividend payments - over a period of time.
In an uncertain market, income streams from assets such as bonds, real estate investment trusts (REITs), and dividend stocks can also cushion your portfolio returns. Bonds in particular, are known for providing consistent income across market conditions. That is because bond issuers have a legal obligation to pay both the principal and the interest. Even if the asset price declines, you would still be receiving regular interest income from your bond investments.
Additionally, income from dividends and interest payments are generally not taxable in Singapore and many other Asian countries.
If you are interested to get started, here are three of the most common income investing methods to consider.
1. Investing in bonds
Bonds, also known as fixed income, are a popular choice for income investors. Since they pay out fixed interest payments at regular intervals, bonds can provide a steady source of income.
When it comes to bonds, you can choose individual bonds like government and corporate bonds, or bond funds that provide diversified exposure to multiple bonds.
While it is possible to buy government bonds such as the Singapore Savings Bond (SSB) with as little as S$500, corporate bonds are typically not as accessible since they can come with a minimum investment amount of at least S$200,000. This makes it prohibitive for retail investors to own a diversified portfolio of individual bonds. For this reason, bond funds may offer a more cost-efficient way to gain diversified exposure to bonds.
2. Investing in REITs
REITs are companies that own and manage commercial real estate assets such as shopping malls, office buildings, hotels, and logistic facilities. REITs collect rental income generated from these assets and distribute it to REIT unitholders at regular intervals.
In fact, REITs are required to distribute 90 percent of their taxable income as dividends to investors. This accounts for their attractive dividend yields. For example, Asia Pacific REITs have generated an average dividend yield of 6 percent per year between 2000 and 20201.
There are many REIT types available, including:
- Office REITs
- Retail REITs
- Industrial REITs
- Healthcare REITs
- Hospitality REITs
Investors can also consider REIT funds for instant diversification across different REIT types.
3. Investing in dividend stocks
Dividends are a way for companies to share profits with their shareholders. However, not all companies pay out dividends. Companies that do so tend to be established firms in mature industries such as banking or telecommunications.
One point to note is that dividend payments are not guaranteed. Companies can choose to reduce or even halt their dividend payments if the business runs into cashflow problems. That is why it is important to choose stocks of companies that have a robust track record of paying dividends consistently.
Tips for successful income investing
As you embark on your income investing journey, here are some things to keep in mind:
1. Understand risk
Income investing is not without risk; understanding the trade-off between risk and return is important for any successful investing. Typically, the higher the potential yield, the higher the risk involved. Ask yourself how much risk you are willing to accept and what your investing time horizon is. This will help guide your asset allocation.
2. Diversification is key
Diversifying your investments is simply not putting all of your eggs in one basket. By including a wide variety of income-generating assets in your portfolio, you reduce your dependence on the performance of any single investment. Additionally, your portfolio will be in a better position to capture income opportunities across different market conditions.
3. Rebalance periodically
Over time, market fluctuations can cause your asset allocation to shift out of sync with your risk tolerance or financial goals. It is important to periodically monitor your investments and rebalance as needed to return your portfolio to its target allocation.
However, take note that frequent rebalancing will incur more fees and transaction charges. These extra costs can also eat into your investment returns.
Instead, research suggests that reviewing your portfolio every six months and rebalancing if your holdings have shifted 5 percent or more from your target allocation is the more optimal strategy for most investors2.
4. Usher in more income with UOBAM Invest
Get an Apple Watch or up to S$200 in credits when you invest with UOBAM Invest from 23 January 2023 to 28 February 2023.
Terms and conditions apply.
1REIT AsiaPac, “How consistent are REITs’ dividend returns in volatile markets?”, November 2022
2Dividend.com, “How often should you rebalance your portfolio?”, December 2019
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