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Back to Basics: Investing for Income

VIDEO: Alex Gard, aged 8, asks Morningstar analyst Louise Babin what income is and why it's important for investors 

Holly Black 2 September, 2019 | 10:38AM

 

 

Holly Black: It's Back to School Week at Morningstar. We're covering all the investment basics. And to help, we've called in a team of young experts.

Alex Gard: Hello, I'm Alex Gard and this is Louise Babin. And today, we are talking about investing for income. What is income important?

Louise Babin: So, income can be important for people who need a regular amount of money coming from their investments, and usually that so they can top up what they get in their wages or their pensions and pay all of their bills. But also, income can be a very good indicator of the health of a financial investment as well.

Gard: How do you get income when you're investing?

Babin: So, you might invest in shares of a company, and then you could receive an income called the dividends. That can change throughout the years. And it's linked to how much of that company that you own. But also, if you invest in bonds, you could get an income payment called a coupon, and actually usually fixed. So, it's the same amount each year and you know how much it's going to be when you start investing.

Gard: Which other investments pay an income?

Babin: So, probably the next most popular will be property. So, it's typically commercial property, so office buildings like this, or shops or maybe even warehouses. And the money that pays the income from those comes from the people who are in the building, so they pay a rent and the rent can change depending on how popular the area is or whether or not people want to build more shops or less shops.

There are also some other alternative income investments, but they can be a bit more complicated, and maybe a lot more risky as well.

Gard: Should I spend the income or save it?

Babin: It depends. If you need that income to pay your bills, you should probably pay your bills with it. But if you don't need that income, what you can do is you can reinvest it in another investment where it then starts to generate its own income as well. And we call that compounding and it can be a very powerful way to boost your long-term returns.

Gard: Thank you, Louise. Goodbye.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Holly Black  is Senior Editor, Morningstar.co.uk

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