Investing for a long-term goal, such as retirement, isn’t the only reason to put money in the markets. Some investments may offer faster payouts, and this kind of income can help investors meet day-to-day obligations and near-term financial goals.
Getting to Know Income Investments
Bonds, income stocks and certain mutual funds can provide investors with a regular source of current income.
Bonds
When you purchase a bond, you are essentially loaning money to a company, government or other entity. In exchange for that loan, the entity promises to pay interest, which becomes the return you may receive. These interest payments are often paid semi-annually and are called "coupons."
Bonds are regarded as stable investments with consistent returns, but be aware that there is always the possibility a bond issuer might not be able to pay the interest or principal.
There are several types of bonds to choose from, including corporate, municipal and government bonds. Each type has a different risk-return profile. For example, corporate bonds can be riskier than government bonds since companies can be at a higher risk for defaulting.
Certain bonds may also come with tax advantages. For example, interest from municipal bonds might qualify for a federal tax exemption, and some state bonds might be exempt from state taxes.
Income Stocks
Income stocks are from companies that regularly pay out dividends, often at a higher amount than the overall market. A dividend is a payout from a company to its shareholders using company profits. Companies that pay out dividends often do so on a schedule but may make unscheduled payments as well.
While paying out dividends is at the discretion of the company, high quality companies that pay dividends usually do so consistently. Depending on the companies you choose to invest in, dividend-paying stocks may provide a reliable source of income.
Equity Income Funds and Bond Funds
Equity income funds and bond funds are income-generating mutual funds. As their names suggest, the former invest primarily in dividend-paying stocks, while the latter are made up of bonds.
The type of bonds that make up a bond fund dictates its risk level. Those that invest in government bonds tend to be low-risk, but the trade-off is that they might offer a low return. Corporate bonds might have a higher return potential, but they can also be higher-risk.
Adding multiple income-generating funds to your portfolio can offer the benefit of diversification. When you buy into several bond funds or equity income funds, your money is allocated across multiple types of income-generating investments, which can bring balance to your portfolio.
Cash Out or Reinvest?
Reinvesting the income generated by your investments year over year could potentially grow your portfolio exponentially. If you have the flexibility to delay your payday, reinvesting may be a strategy worth considering. A Financial Advisor can discuss with you the merits of both options—drawing current income from your investments or letting the money continue to work for you before cashing out.
This article has been prepared for informational purposes only. The information and data in the article has been obtained from sources outside of Morgan Stanley. Morgan Stanley makes no representations or guarantees as to the accuracy or completeness of the information or data from sources outside of Morgan Stanley. It does not provide individually tailored investment advice and has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The strategies and/or investments discussed in this article may not be appropriate for all investors. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a Financial Advisor. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.
Equity securities may fluctuate in value in response to news on companies, industries, market conditions and the general economic environment. Companies paying dividends can reduce or stop payouts at any time. Past performance is no guarantee of future results. Investing in stock securities involves volatility risk, market risk, business risk, and industry risk. The prices of stocks fluctuate. Volatility risk is the chance that the value of a stock will fall. Market risk is the chance that the prices of all stocks will fall due to conditions in the economic environment. Business risk is the chance that a specific company’s stock will fall because of issues affecting it such as the way the company is managed. Industry risk is the chance that a set of factors particular to an industry group will adversely affect stock prices within the industry. Bonds are subject to interest rate risk. When interest rates rise, bond prices fall; generally the longer a bond's maturity, the more sensitive it is to this risk. Bonds may also be subject to call risk, which is the risk that the issuer will redeem the debt at its option, fully or partially, before the scheduled maturity date. The market value of debt instruments may fluctuate, and proceeds from sales prior to maturity may be more or less than the amount originally invested or the maturity value due to changes in market conditions or changes in the credit quality.
Call Risk: Bonds may be callable prior to maturity date which may reduce an investor’s total return. In the event that a bond is called, the investor’s total return may be reduced.
Credit and Default Risk: The possibility that an issuer might be unable to pay interest and/or principal on a timely basis.
Interest Rate and Duration Risk: Interest rate risk is the possibility that the market value of a bond might fall due to a rise in prevailing interest rates. Duration measures a bond’s price sensitivity to changes in interest rates. The longer the bond’s duration, the more sensitive its market value is to changes in interest rates.
Reinvestment Risk: Proceeds from interest payments and returned principal may have to be reinvested at a lower interest rate than was present when the initial investment was made, resulting in a decline in return to the investor.
Liquidity Risk: Liquidity risk is the possibility that an investor may be forced to sell a security at a discount in the secondary market, due to a lack of buyers. Liquidity can vary considerably depending on the type of product being traded
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