(Fixed) Income Investing: How to Get Started in Singapore

Financially Reviewed by Edward Hee
By Firdaus Syazwani

Published: 21 November, 2024
Last Updated: 21 November, 2024

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Are you looking for a way to make your money work for you without the constant ups and downs of high-risk investments?

If so, income investing might just be what you’re after.

In this post, you’ll learn:

What income investing is and how it works
The key assets typically found in an income-focused portfolio
Tips for building and managing your income portfolio
Who income investing is best suited for – and why

Keep reading to find out how income investing could help you build the financial stability you’re aiming for.

What is income investing & how does it work?

Income investing is all about generating a consistent stream of cash flow from your investments.

Unlike other strategies that may focus on growth or capital appreciation, income investing prioritises steady earnings, whether that’s from dividends, interest payments, or even rent if you’re investing in property.

The main goal is to create a reliable income source to support your financial goals without selling off your assets.

Fixed income investing vs income investing

Although they might sound similar, fixed-income and income investing are distinct approaches with unique objectives.

If you’re aiming for consistent, predictable returns, fixed-income investing focuses on precisely that.

It involves assets that offer fixed payments over time, like government bonds or high-grade corporate bonds.

Here, you’re dealing with investments with a predetermined interest rate, so the income stream is stable and usually doesn’t fluctuate.

This makes fixed income an ideal choice if you prioritise capital preservation and steady returns – perfect for conservative investors or anyone approaching retirement who wants to protect their principal.

On the other hand, income investing is broader.

While it includes fixed-income assets, it also opens up opportunities with other income-generating investments, such as dividend-paying stocks or REITs (Real Estate Investment Trusts).

These assets might offer more variable returns, as dividends can fluctuate with a company’s performance, and REIT income can depend on property market conditions.

However, the appeal here is that income investing can provide growth potential alongside cash flow.

Why income investing?

Steady cash flow

The biggest draw of income investing is the reliable cash flow it provides.

With a portfolio generating regular income, you have a stream of funds that can supplement retirement savings, cover living expenses, or even support your desired lifestyle.

This is particularly appealing if you want predictable returns, as income investments offer a dependable source of money that you can choose to reinvest for compound growth or draw down as needed.

Lower volatility

Unlike growth-focused investing, which can be a rollercoaster, income investing emphasises lower-volatility assets like bonds and dividend stocks.

Investment-grade bonds, for example, are typically less volatile and more resilient during market downturns, providing an anchor of stability.

Dividend stocks add further balance.

While they fluctuate, they generally belong to companies with steady earnings and a solid track record of payouts.

Reinvestment opportunities

If you don’t need to use the income immediately, you can put it back into your investments, allowing your wealth to grow over time.

For instance, stock dividends can be reinvested to buy additional shares, creating a powerful compounding effect.

This strategy means that your returns are not just from the initial investment but also from the reinvested income, gradually boosting your overall gains.

Over the years, this reinvestment can significantly enhance your returns and is a popular strategy for those focused on long-term wealth building.

Inflation hedge

Another key advantage of income investing is its potential as an inflation hedge.

Many income-producing assets, such as real estate and dividend-paying stocks, are designed to keep pace with inflation.

Take dividend stocks, for example – companies that regularly pay dividends often adjust their payouts in line with inflation.

This can help maintain your purchasing power over time, as the income you’re receiving is not eroded by rising costs.

This makes income investments not only a source of steady cash flow but also a practical way to protect against inflation’s impact on your money, especially in the long term.

It’s worth noting, however, that not all income investments keep pace with inflation equally.

Traditional fixed-income investments, like regular bonds, may not offer the same protection since their payouts are fixed and lose purchasing power in an inflationary environment.

What’s usually in an income investing portfolio?

Government bonds

Government bonds are among the safest assets in an income portfolio, providing a stable and predictable income stream.

When you purchase a government bond, you’re essentially lending money to the government, which, in return, pays you interest at regular intervals.

These bonds are generally low-risk, backed by the government’s ability to meet its financial obligations.

Singapore Savings Bonds (SSBs), for example, are a popular choice in Singapore due to their security and steady returns.

Corporate bonds

For a bit more yield, corporate bonds are a common choice.

When you invest in a corporate bond, you’re lending money to a company for a specific term, and in return, you receive interest payments.

While corporate bonds carry a bit more risk than government bonds – since companies can be more financially volatile than governments – their yields are typically higher to compensate for this added risk.

Investment-grade corporate bonds are generally safer, while high-yield (or “junk”) bonds offer even higher returns but come with more risk.

Dividend stocks

Dividend stocks are shares from companies that provide regular, and sometimes growing, dividends to their shareholders.

Companies that pay dividends are often well-established, financially stable businesses with a track record of steady earnings.

Within dividend stocks, common shares provide both dividend income and potential voting rights, and preferred shares usually offer higher dividend yields and priority over common shares in dividend distribution.

Real estate investments

Real estate is another solid choice for income investors, as it generates income through rental payments and can offer certain tax advantages.

Direct property investment, such as buying a rental property, allows you to earn a steady stream of rental income, but it also requires hands-on management.

For more passive investors, Real Estate Investment Trusts (REITs) offer exposure to income-producing properties without the need to manage them directly.

Real Estate Investment Trusts (REITs)

Real Estate Investment Trusts (REITs) are a popular choice for income investors who want exposure to real estate without the hassle of managing physical properties.

REITs pool funds from investors to purchase and manage income-generating properties, such as shopping centres, office buildings, or industrial parks.

In return, they pay out a significant portion of their rental income as dividends to shareholders.

Because REITs are typically structured to prioritise income distribution, they’re a reliable source of regular payouts.

In markets like Singapore, REITs are especially attractive for their high yields and potential for property appreciation over time.

Income-paying unit trusts

Income-paying unit trusts are pooled investment funds managed by professional fund managers.

These funds invest in a diversified mix of income-generating assets, such as bonds, dividend stocks, or REITs.

Investors in unit trusts receive income distributions, which can be reinvested or withdrawn depending on their needs.

Unit trusts allow income investors to diversify across different asset classes, often with lower capital requirements, making them accessible and practical for those seeking stable returns.

Income paying ETFs

Income-paying Exchange-Traded Funds (ETFs) work similarly to unit trusts but trade on stock exchanges, offering greater liquidity and transparency.

These ETFs are designed to generate regular income, often by tracking indices of dividend-paying stocks, bonds, or other income-oriented assets.

With income-paying ETFs, you benefit from diversification without buying each asset.

Plus, their structure allows you to enter and exit positions more flexibly than traditional unit trusts.

How do I build an income-based portfolio?

Diversification

By spreading investments across various asset classes – such as dividend stocks, bonds, REITs, and income-focused ETFs – you’re better equipped to handle market fluctuations.

For instance, while stock dividends might dip during economic downturns, bonds and REITs can help stabilise the portfolio with consistent payouts.

Geographic and sector diversification is also key.

This way, a downturn in one market or industry won’t drastically affect your entire income stream.

The goal is to create multiple sources of income that collectively offer reliable payouts, no matter how the market behaves.

Understanding distributions

Not all income sources are the same, so it’s essential to evaluate how sustainable and consistent each payout is.

Start by considering whether the investment offers a fixed or variable distribution.

Does it pay monthly, quarterly, or annually?

Knowing the frequency helps in planning cash flow.

Additionally, assess if the distributions are linked to the asset’s capital value, as this can impact payouts in a market decline.

Some funds, like certain REITs or dividend stocks, aim to grow distributions over time, which can enhance long-term returns if reinvested.

Monitoring fund performance

Regular monitoring of fund performance is essential in an income-based portfolio, as distribution frequency alone doesn’t tell the whole story.

While consistent payouts are a good sign, it’s equally important to look at the fund’s capital base.

A strong, stable capital base supports income generation over the long term, making it easier to meet your financial goals.

Monitor factors like net asset value (NAV) and underlying asset quality to ensure your investments perform well.

Monitoring performance helps you decide if you need to make adjustments, ensuring your portfolio stays on track to provide income and growth.

Total return focus

Building an income portfolio isn’t just about the cash flow – it’s about maintaining a total return focus.

This means balancing both capital preservation and income growth.

By choosing a mix of income-generating assets that also offer potential for capital appreciation, like dividend stocks or REITs, you create a portfolio that can help maintain or even increase your real income level over time.

How do I estimate how much income I’ll get from my investments?

Here’s a simple approach to estimating your investment target:

First, determine how much you need, then work backwards.

Before diving into calculations, think about your ideal monthly income.

How much would cover your expenses or desired lifestyle?

Say, for example, you want $3,000 per month in income – that’s $36,000 per year.

Next, assume a prudent 4% rate for income planning. It is a standard, conservative benchmark, aiming to provide a steady income without depleting your capital too quickly.

Then, work out your investment goal.

If you’re aiming for $36,000 per year and assuming a 4% rate, you can calculate your needed investment as follows:

Investment needed = Annual income target/Assumed rate

So, to get $36,000 annually at a 4% return, you would need:

Investment needed = 36,000/0.04 = 900,000

This means you’d need approximately $900,000 invested at a 4% rate to generate $3,000 monthly income.

What are some disadvantages of income investing?

Lower growth potential and limited compounding

Income investments like dividend stocks and bonds typically offer lower growth potential than high-growth stocks.

Companies that pay high dividends tend to reinvest less in their growth, which limits the opportunity for significant capital appreciation.

This can be a disadvantage if you aim to build substantial long-term wealth.

Additionally, if you don’t reinvest the dividends you receive, you miss out on the power of compounding – one of the biggest contributors to long-term growth.

Interest rate and inflation sensitivity

Many income-generating assets, especially bonds and REITs, are sensitive to changes in interest rates and inflation.

When interest rates rise, bond prices tend to fall, which can decrease the value of your fixed-income investments.

REITs can also take a hit, as higher interest rates increase borrowing costs, impacting their income-generating potential.

Inflation, on the other hand, erodes the real value of fixed-income payments, meaning your purchasing power might shrink over time.

In inflationary periods or rising rate environments, income investing may be less effective at preserving value.

Dividend cuts and sector concentration risk

Income-focused portfolios often rely heavily on dividend-paying companies.

However, during economic downturns, companies can cut or reduce dividends, impacting your expected cash flow.

This risk is compounded by sector concentration.

Income investing often leads to a heavier focus on sectors like utilities or telecommunications – areas known for high dividends but also for sector-specific risks.

If these sectors face challenges, your portfolio may lack the diversification needed to mitigate losses, potentially increasing overall risk.

Capital preservation isn’t guaranteed

While income-generating assets like dividend stocks and bonds are often more stable than growth assets, they’re not immune to market risks.

These investments can lose value due to market downturns, rising interest rates, or credit risk.

This means that, despite their income-generating potential, income investments don’t always guarantee capital preservation, which can impact the overall value of your portfolio over time.

If you’re looking for something more stable, then a pure bonds portfolio is best.

Otherwise, you might want to look into getting a capital-guaranteed retirement plan.

High capital requirement for significant income

Income investing can also require a substantial initial investment to generate meaningful income.

For instance, if your goal is a 3% yield, you’d need around $100,000 invested to produce just $3,000 per year.

For many investors, this may not be enough to cover substantial expenses or income needs.

This high capital threshold means income investing can be less accessible for individuals with smaller portfolios, potentially limiting its practicality as a primary income strategy for some investors.

Who is income investing for?

Retirees

For retirees, income investing offers a dependable way to generate regular income that can cover living expenses without depleting capital.

With a portfolio built around bonds, dividend stocks, and REITs, retirees can enjoy predictable payouts, providing peace of mind as they navigate their post-working years.

The focus on capital preservation aligns well with retirement goals, as it helps safeguard savings from significant market fluctuations.

Conservative investors

If you’re a conservative investor who values lower risk and more predictable returns, income investing is likely a good match.

By prioritising assets like investment-grade bonds, REITs, and stable dividend-paying stocks, this approach offers a more reliable return profile compared to growth-focused investments.

It’s a strategy that works well if you’re looking to grow your wealth steadily without the intense volatility often associated with high-growth assets.

Conclusion

Income investing can be a powerful way to build a reliable cash flow, whether you’re planning for retirement or simply looking for steady returns.

We’ve covered the basics – what income investing is, the types of assets that typically make up an income portfolio, and the pros and cons to consider.

From government bonds to dividend stocks and REITs, there are plenty of options to craft a portfolio that suits your financial goals.

We’ve also discussed who income investing is best suited for, including retirees and conservative investors who value stability.

If you’re feeling unsure about how to start or want some guidance on building an income-focused portfolio, you don’t have to go it alone.

Our financial advisor partners are here to help, and you can chat with them for free to get tailored advice that fits your needs.

Whether you’re ready to dive in or just exploring your options, a bit of professional insight can make all the difference.

References

Firdaus Syazwani

In 1999, Firdaus's mother bought an endowment plan from an insurance agent to gift him $20,000. However, after 20 years of paying premiums, Firdaus discovered that the policy was actually a whole life plan with a sum assured of $20,000, and they didn't receive any money back. This experience inspired Firdaus to create dollarbureau.com, so that others won't face the same problem of being misled or not understanding what they are purchasing – which he sees as a is a huge problem in the industry.

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