Financial Planning Tips for Income Investors
As part of their Seeking Income Week, Morningstar asked Informed Choice chartered financial planner Martin Bamford for our Financial Planning tips for income investors.
Martin started by explaining that there is often a difference between the level of income you feel you need and the level of investment risk you are prepared to take to achieve it.
When investing with the objective of generating regular income contributions, said Bamford, an investor can either rely on yield-generating assets (such as dividend-paying equities, bonds, or funds) or buy into products that offer exposure to capital growth from which you can take regular capital withdrawals as ‘income’.
Martin also explained that tax is one of the biggest challenges for income investors, particularly for those with earned income in addition to investment income.
According to Bamford, the way to address this challenge is careful planning and thoughtful accounting, including dividing portfolios between husband and wife, or making full use of allowances and exemptions.
Martin told Morningstar that diversification across the investment asset classes is an important step for income investors to take.
It is for this purpose that Bamford notes the benefit of allocating a portion of your portfolio to real estate, given that the correlation characteristics of real estate to other holdings in an income portfolio are essential from a risk management perspective.
Finally, Martin explained that income investors are usually best served by investing in UK rather than international equities, as the dividends paid by UK companies are typically higher than those paid by overseas companies, for a variety of historic reasons including the taxation environment.