Five tips for investing income

Bricks and Mortar

The challenge when seeking income is often to avoid doing so at the expense of capital, and the property market has had a torrid time during the credit crunch. However, with the improvement in the banking sector’s fortunes has come a better financing environment for commercial property, which is developing a sounder footing. Commercial property funds and trusts offer valuable diversity.

Company debt

There’s little reward in investing in gilts, given that the return from lending money to the government for ten years is, typically, a little over 2 per cent and will generally have a capital loss built in to the purchase price. However, there are still pockets of value within the bonds issued directly by UK companies – corporate bonds – and the smarter fund managers are still able to deliver positive capital returns alongside a more helpful level of income.

Cashing in on dividends

UK shares are a solid source of income which stands a chance of rising over time to try and keep pace with inflation. The risks inherent in a share portfolio are well known and must be taken into account, but for the smaller investor in particular, a unit trust manager specialising in dividend growth can often tread the fine line between delivering high levels of income now and producing a growing stream of dividends over a period of several years. In addition, the thirst for income is being met by a growing number of funds seeking income in areas such as Asia and the Emerging Markets.

Structured products

The growth in derivative products such as futures and options has facilitated the creation of products specifically designed to give a guaranteed level of income while (to a greater or lesser degree) protecting the underlying capital. While the charges on these can be high, reflecting the complexity of the underlying structure, they can often be helpful for investors needing a degree of certainty about the pattern of income flows. However, investors must be aware of the risk to their capital and advice is recommended.

Energy funds

As renewable energy projects continue to spring up around the country, the developers of wind and solar farms often need to recycle the capital from one project into the next. Step forward the income fund manager, who will take on the fully-constructed energy project and reap the regular income flows. While returns are steady rather than stellar, they have the attraction of the benefit to the environment they represent.

l Simon Lloyd is chief investment officer at Murray Asset Management