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The Basics of Income Investing

What is income investing and what routes to income are available to investors?

Morningstar Analysts 10 August, 2012 | 0:00

With interest rates at historic lows, investors are having to look further for the income that in the past had been ensured by savings accounts and gilts. Income investing is the process of selecting investments designed to deliver a steady stream of income over a certain period of time. This goal can be achieved in a number of ways, including owning corporate or sovereign debt, equities that pay dividends, or funds that provide access to both. In contrast with selecting investments for their purported capital gain—the profit that can be made by selling the investment at a higher price in the future—income investments should pay the investor an income almost irrespective of the investment’s market value.

Seeking Yield in Fixed Income
Bonds are often considered central to income investors because of their nature of delivering fixed rations of income over set intervals. Seeking income in developed-world sovereign debt markets has traditionally been the way to shelter one’s savings from risk, but recent developments have forced investors to look further afield as these ‘no risk’ investments currently offer a negative real return (the coupon rate that they pay out is less than inflation).

Even within the fixed income space there are varying degrees of risk, however. High-yield bonds, for example, are securities that pay a fixed interest but are below investment grade bonds—their risk of default is relatively high and therefore their providers pay out higher yields to the bond holders who are willing to accept the relatively higher risk involved. A metric often sited alongside high yield bonds is the spread between these securities and high quality, lower risk fixed income, such as UK Gilts or US Treasuries.

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