Investing for income
The purpose of an investment can be to generate capital growth or income, or both. Investing for income means that the purpose of your investment is to generate regular cash payments - either so that you can invest in something else, or supplement other cash income (from a salary, pension, or grant). This is also often referred to as passive income - being money generated by the ownership of assets rather than through performing a job. In the context of financial markets, income investments include dividend-paying equities, preference shares, bonds, listed property, or cash instruments.
Importantly, the risks associated with investing in these different income-generating assets are different, as is the tax treatment.
Equities
Different companies have different dividend policies. Within equities it is important for income investors to choose companies that pay regular, high, and growing dividends. It is also important to look at the share price relative to the dividend. Typically, income investors will look at the ”dividend yield” and the outlook for the company (will the company be able to continue paying dividends? Will these dividends grow over time?).
Investors can also look to exchange traded funds (ETFs) or exchange traded notes (ETNs) that invest in a basket of income generating shares as opposed to investing in individual companies. In this way, risk is diversified, and it removes the difficult choice of choosing individual companies to invest in. Examples of these are the Coreshares SA Dividend Aristocrats ETF, the SATRIX Divi ETF or the Coreshares Global Dividend Aristocrats ETF. We like the Coreshares offerings because they select companies with a strong track record of paying dividends as opposed to companies showing the highest dividend yield.
Preference Shares
Preference shares, or Prefs for short, are ”hybrid” equity instruments. Preference shareholders will receive dividends before ordinary shareholders and typically offer a fixed dividend stream linked to the prime interest rate. This means that as the repo rate increases, so does the monetary value of the dividend and vice versa - the value of the preference share does not necessarily coincide with the value of the ordinary shares of the company.
In the instance of preference shares, investors can also look to ETFs to remove the onus of choosing individual preference shares and to ensure liquidity. The Coreshares Preftrax ETF provides such an entry point.
Bonds
Bonds offer a fixed income from money you 'lend' to the government or companies who need to raise cash, in the form of interest. The capital is then paid back at the end of a specific fixed period.
Investors can purchase individual bonds through an exchange like the JSE, or alternatively can invest in “over the counter“ products like retail savings bonds, where liquidity is low, but the yields are usually higher, and the initial capital outlay is also less onerous. Alternatively, investors can consider bond ETFs such as the 1vest SA Bond ETF, the SATRIX SA Bond Portfolio ETF, the SATRIX GOVI ETF and the CoreShares Wealth GOVI ETF; or the FNB Government Inflation Linked ETF or SATRIX ILB ETF for inflation linked exposure, or the FNB World Government Bond ETF, SATRIX Global Aggregate Bond ETF or 1vest Global Government Bond ETF for international bond exposure.
Listed Property
Listed property offers investors interest payments whereby they pay out most of their income as interest to shareholders. These companies earn their income mostly from rental income which usually tracks inflation quite closely.
Investors can either look to buy listed property companies directly in the market or buy a listed property ETF such as the 1vest SA Propery ETF, the CoresharesSA Property Income ETF or the SATRIX SA Property ETF; or the CoreShares S&P Global Property ETF or SATRIX Reitway Global Property ETF for international exposure.
