Boost your portfolio with these income-generating assets

You are at the top of your game. You have built a business and are successful in your craft. As you get to save and grow your wealth, you feel the need to have your hard-earned money work for you as you plan for expected future needs like children’s education and retirement.

What you need are income-generating investment assets to augment or broaden your current income streams.

In our previous article, “Real estate investing for discerning Filipino investors”, we highlighted real estate as an investment that provides cash flow income and long-term capital appreciation. This time around, we are focusing on financial assets such as cash, bonds, and equities and how to create an income-generating investment portfolio.

Let’s do a deep dive into some of these financial assets.

Time deposits or fixed income securities

“Living on interest.” I first heard this from my grandmother who was living on interest income from her time deposits. Back in the ‘90s, when time deposit rates reached double digits, one can readily live on interest from time deposits.

Through the years, we have seen that interest rates have come down to single digits and time deposits have become short-term (less than 1 year in tenor) and long-term time deposits are not usually offered. We see the risk of not being able to re-invest at the same interest rate.

This reinvestment rate risk on the principal amount is usually the reason why an investor considers longer-term fixed income investments such as government bonds and corporate bonds. With bonds having longer maturity dates of three years or as long as 25 years, one can lock in interest income from a bond investment until it matures.

Dividend income from shares of stocks

Another passive source of income comes from the ownership of shares of stock in companies that give out dividends.

The usual types of equities are common shares and preferred shares. Common shares give you part ownership of a company. You are given voting rights, and such rights become valuable when it comes to voting on key decisions about the company. You are also entitled to receive dividends.

The other type of equity is preferred shares. They are called “preferred” because those who hold them have preferential treatment when it comes to receiving cash dividends declared for distribution to the shareholders.

Usually, preferred shares would have a redemption date or a series of dates and no voting rights. The dividend payout rate is fixed (e.g., 6% per annum).

With common shares, there are no redemption dates, and dividend payouts can vary depending on the profitability of the company. Hence, with common shares, you can continue to receive dividends as long as you own them, and as long as the company declares dividends.

The predictability of the payout rate and how often the dividends are declared are key considerations when choosing which type of stock (common or preferred) to invest in.

Income-paying funds

On the other hand, there are other convenient solutions in achieving income generation: income-paying funds. Asset managers have income-paying pooled funds (be they unit investment trust funds, or UITFs, or mutual funds) available for retail investors.

These are professionally managed funds. For a nominal fee, you can let the fund managers invest in a portfolio aimed at generating income through dividend-paying stocks, bonds, and other assets.

It is a matter of choosing a mix of income-paying funds that will meet your payout target while the fund manager takes care of the investment management decisions. (To be continued.)

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DEXTER AGCAOILI is the Retail Propositions Director for Single Premium Products and Unit Linked Funds Category at AXA Philippines. He has a solid background in finance, investment management, and governance, having held leadership positions in the financial industry. He has also taught at De La Salle University and the University of the Philippines Business School and served as a lecturer for certification programs like the PSE Certified Securities Specialist course and CFA Philippines. Dexter earned his business economics degree and master’s degree in finance from the University of the Philippines. His hobbies include collecting timepieces, and part of family time is traveling and playing Cash Flow 101 with his two daughters.