On the Money to the Masses podcast, Damien Fahy discussed how Britons can build an income portfolio that produces a growing income over time, in excess of inflation. One of the most important things about investing for income is “the need to diversify your portfolio”, he said.
There are a lot of different things that Britons can choose to invest in such as shares, however, Mr Fahy warned that this requires a certain level of analysis, understanding and time.
He suggested that investing in a fund can be a less risky option.
He said: “Investing in a fund that is run by a manager where the mandate is to provide an income stream, they will invest in tens and hundreds of companies and use the dividend payments that come in to provide a pay-out to the investors in that fund.”
People should not just draw their income from one fund.
He said: “As a general rule of thumb, funds that are equity based that are aiming to provide an income tend to be the best at providing a growing income over time.
“So, if you want to produce income from an asset, you want that income to increase in line with inflation at least or the income in real times is getting smaller over time. You can use lots of different assets whether it’s property or bonds.
“Equities tend to provide one of the most reliable ways of building an inflation proofed income stream because dividends tend to go up over time.
“So, if you invest in an income portfolio, the capital value of those funds are going to go up and down, but because you are taking the natural pay outs, you’re not so bothered about the individual ups and downs of the funds from day to day as you’re not drawing down on the capital in any way.
Funds have different yields because they are made up differently, he said.
He explained that the reason some funds are made up different is because some use “covered cool options”.
This is when the fund manager uses a strategy to boost the income that the underlying portfolio will naturally yield.
Mr Fahy advised Britons to seek financial advice before putting their money in things they do not understand.
With investing, capital is at risk.