Investing for income when interest rates are low

The official cash rate has been sitting at a historic low of 0.1%  since December 2020. With global growth barely moving and consumer debt at high levels, it’s conceivable that rates could remain low for a long time to come.

Lower rates over a number of years aren’t all bad. Offering benefits for those paying off a mortgage or funding a business, but it is the savers and income investors who get hurt the most.

With cash investments offering low returns, those nearing retirement are going to have to save more while working to meet their retirement goals. And that’s difficult enough as it is with an increased cost of living.

Fortunately, there are a few options available outside of cash, when investing for income when interest rates are low.

Risk versus reward when investing for income

It’s important to know upfront that while there is some promising income producing investment ideas in the current low-interest rate environment, they do come with a higher level of associated risk. That’s something you need to wrap your head around before you start thinking past a savings account or term deposit for better returns.

By diversifying your investments across a range of asset classes, you can prevent exposing yourself to an unacceptable level of risk by putting all of your eggs in one basket.

We’ve put together some of the income-producing investments available to you in this low-interest rate environment. Together with what you need to consider when deciding to invest. As everyone’s situation is different, professional advice from an experienced adviser is recommended.

High Yield Shares

When interest rates are low, shares are one of the first options that investors turn to. Interest payments are often a major cost for businesses so when rates are low it can mean that business profits increase and share prices rise.

Investing in the share market will expose you to increased volatility, so determining your level of portfolio risk is an important first step as share prices fluctuate all the time so are not ideal for short-term investments.

Even blue-chip shares can be riskier than other investment options, as high dividends can potentially mean the company has less to invest in future growth. So when investing for income, it’s important that stocks are not only healthy but have a strong history of paying dividends from a stable earnings base.

Dividend franking coupled with the potential for capital growth make high yield shares an attractive option. With share trading platforms making it easy to sell and buy quickly for low entry and transaction costs.

Bonds 

Bonds offer a stable investment by providing a reliable income. Government bonds are often an attractive option as you can invest with a small budget and invest directly on the ASX, just like you would shares. Where other types of bonds are harder for individuals to access.

Corporate bonds offer a way for you to indirectly lend money to a company, with the company making interest payments to you as a return. This helps companies to raise funds.

While they tend to be safer than other investment alternatives, a result is lower yields and the risk that you may not always get your money back on corporate bonds.

Exchange Traded Funds (ETFs)

Rather than investing in individual shares, some investors prefer ETFs, which are managed funds directly traded on the ASX.

While traditional ETFs track the share market index, there is now a huge range of ETF options available with some specifically designed to generate income. In these cases, the funds offer exposure to high-yield shares with regular franked dividends, or even invest in high-interest deposits.

ETFs can be an effective way to diversify and help you get low-cost exposure to assets that might otherwise be out of reach.

While ETFs are seen as a low-cost option, you will need to consider having to pay a management fee and brokerage when you buy and sell.

High Yield Managed Funds

Managed funds are worth considering to get affordable exposure and diversification to a range of income-generating assets.

They are great for being able to be tailored to a different balance of risk and return depending on your risk profile, as they allow you to diversify across asset types, industries and countries.

The fund you choose will charge a management fee as professional expertise comes at a cost. So be sure to look for a provider that offers value and take into account the impact the fee will have on your returns.

Peer-to-peer lending

A relative new-comer to the income-producing investments arena, peer-to-peer lending allows investors to lend money to a borrower through a third-party lending site. The borrower pays you back at an agreed rate of interest within a specified time frame.

The rate of return for peer-to-peer lending is higher than a savings account, however, does come with the added risk that the borrower may default on the loan and there is a chance you won’t get your money back.

Growing your income producing investment portfolio

With a range of options to choose from, you might determine that a diversified portfolio made up of a few of these investment options may allow you to enjoy higher yields while managing risks.

Unlike cash, none of these investments are government guaranteed, but you may reduce your risk through diversification.

In the sustained low-interest rate environment, are you investing in income-producing assets?

If you need help building your portfolio, talk to a Modoras Financial Planner. We can work with you to tailor an approach that is unique to your needs.

IMPORTANT INFORMATION: This fact sheet has been prepared by Modoras Pty. Ltd. ABN 86 068 034 908 an Australian Financial Services and Credit Licences (No. 233209), located at Level 3, 50-56 Sanders St, Upper Mt Gravatt Q 4122. The information and opinions contained in this fact sheet are general information only and is not intended to represent specific personal advice (Accounting, taxation, financial, insurance or credit). No individuals personal circumstances have been taken into consideration for the preparation of this material. Any individual making a decision to buy, sell or hold any particular financial product should make their own assessment taking into account their own particular circumstances. The information and opinions herein do not constitute any recommendation to purchase, sell or hold any particular financial product. Modoras Pty. Ltd. recommends that no financial product or financial service be acquired or disposed of or financial strategy adopted without you first obtaining professional personal financial advice suitable and appropriate to your own personal needs, objectives, goals and circumstances. Information, forecasts and opinions contained in this fact sheet can change without notice. Modoras Pty. Ltd. does not guarantee the accuracy of the information at any particular time. Although care has been exercised in compiling the information contained within, Modoras Pty. Ltd. does not warrant that the articles within are free from errors, inaccuracies or omissions. To the extent permissible by law, neither Modoras Pty. Ltd. nor its employees, representatives or agents (including associated and affiliated companies) accept liability for loss or damages incurred as a result of a person acting in reliance of this publication.