Top 8 Tips for Investing Your Income for Income

How do you generate a reliable income when interest rates are stuck at all-time lows?

Here are 8 tips to help you develop income growth from investments:

1. Look for sustainable long-term dividend growth

Investing in businesses when the growth potential is not reflected in the valuation of their shares not only reduces the risk of losing money, it increases the upside opportunity.

2. Inflation always matters

Always bear in mind the detrimental effect of inflation. Bonds offer higher yields than cash but returns can be eroded by inflation. Investment in property or equities are perfect vehicles to help achieve an income that rises with inflation.

3. Look to International diversification

A small number of UK companies account for approximately 40% of dividend payouts in the UK, whereas over 100 companies in the US, for example, can provide an opportunity to increase the longevity of your dividend growth.

4. Patience is a virtue

Investing for income is all about the compounding of returns for the long term. As a general rule, those businesses best placed to offer this demonstrate consistent returns on invested capital and visible earnings streams, so put your money in and leave it to grow.

5. Reliability is the most important

Choose sectors on the equity markets that do not depend on strong economic growth to you deliver attractive returns.

6. Growing cash flow

Look for companies with money left over after all capital expenditure, as this is the stream out of which rising dividends are paid. The larger the free cash flow, relative to the dividend pay-out, the better.

7. Dividend growth

In the short term, share prices are buffeted by all sorts of influences, as the last few weeks have been testament to, but over longer time periods fundamentals will always shine through. Dividend growth is the key determinant of long-term share prices – the rest is sentiment

8. Take a cautious approach

Be cautious of companies that pay a high dividend because they are likely at the end of their current growth cycle.