Investing for income: the basics

One of the first things to think about when choosing investments is what you want them to do. Do you want their value to grow over time? Or do you want them to provide you with an income?

Income investing means choosing investments that aim to provide you with an income, such as through dividends or interest. You can take this income as cash, while your investments may also rise or fall in value.

Why invest for income?

Income investing may not suit everyone, but you might want to think about it if:

• you’re looking for an additional source of income
• you’re approaching or already in retirement
• you want to take an income from your investments rather than regularly selling investments to raise cash

How does investing for income work?

Your investments can provide income in different ways, depending on what you hold.

• Dividends from shares

When you buy shares in a company, you own a small part of that company. Some companies pay some of their profits to shareholders as dividends.

Dividends may be paid once, twice or several times a year. Companies don’t have to pay dividends, and the amount can change from one payment to the next.

• Payments from income funds

A fund allows investors to pool their money together and invest across a range of assets, such as shares, bonds or a mix of both.

Some funds are designed to provide an income from the investments they hold. Depending on the fund, payments may be made monthly, quarterly, twice a year or annually.

If you want the fund to pay this income to you, look for an income or distributing version. This will usually be labelled ‘Inc’ and may sometimes be shown as ‘Dis’.

You may also see an accumulation version, usually labelled ‘Acc’. With these funds, any income is automatically reinvested rather than paid to you.

So, if you want to receive payments from your fund, make sure you choose the income or distributing version rather than the accumulation version.

• Interest from bonds

A bond is effectively a loan made by investors to a company or government.

In return, the borrower will normally make interest payments, known as coupons, during the bond’s term and repay the bond’s face value at the end of the bond’s term.

These payments can provide an income, although they aren’t guaranteed if the issuer runs into financial difficulty.

What are the risks?

Investing for income comes with risks:

• Dividend risk - dividends can be reduced or cancelled if a company’s profits fall or it decides to keep more of its money within the business.
• Fund income risk - the income a fund pays can rise or fall and isn’t guaranteed.
• Bond risk - a company or government may be unable to make interest payments or repay a bond. Bond prices can also rise and fall, particularly when interest rates change.
• Capital risk - your investments can fall in value. So, you could receive an income, but you may get back less than you invested.
• Inflation risk - if your income doesn’t increase over time, rising prices could reduce what you can buy with it.

A high level of income doesn’t necessarily mean an investment is performing well. An investment’s overall return includes both the income it pays and any rise or fall in its value.

For example, you could receive a high income but still lose money overall if the value of your investment falls by more than the income you receive.

Need help choosing an income fund?

Fidelity’s Navigator tool can help you explore diversified funds designed to provide an income based on the features that matter to you.

Simply choose ‘Income’, then answer a few questions about how you’d like the fund to be managed and how much investment risk you’re comfortable taking.

Navigator will then show you a multi-asset fund to consider based on your answers. The tool doesn’t provide a personal recommendation, so you’ll still need to decide whether the fund is right for your circumstances.

Finding the right balance

When it comes to investing for income, the right approach will depend on whether you need an income now, how long you plan to invest for and how much risk you’re comfortable taking.

Income doesn’t have to be your only aim. You may want your investments to provide an income while also having the potential to grow in value over time. The balance between the two will depend on your circumstances and what you want your investments to achieve.

• Read: Growth versus income investing: the basics
• Read: Not sure how to invest? Start here
• Read: How to review your investment portfolio

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. Direct shareholdings should generally form part of a well-diversified portfolio of other investments. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.