Whether you want to build your portfolio for income or investment, finding the right strategy is becoming increasingly difficult when interest rates remain low and stock markets are volatile.
This means that many investors who had not previously been willing to take a risk with their savings are now taking a fresh look at how to boost their portfolio income.
A new study by the Share Centre claims they could be missing an obvious trick to generate money.
They have revealed that 45% of income investors do not have any stock from the top income producing companies in the FTSE 100 in their portfolios.
Firms such as HSBC, United Utilities, Vodafone and Royal Dutch Shell are among some of the top income producing companies ignored by investors.
Income v growth
The survey also revealed that income investors are probably looking to the wrong sectors to generate income. They say 43% favour holding shares in banks which are nothing like the income producing stocks they once were.
One surprising finding was that a quarter of respondents said they had invested in technology stocks for income, when this is a sector heavily geared towards growth.
The real reason why investors are seeking income from stocks and shares, suggest 45% of people, is to make their portfolio supplement their disposable income. Around 61% reckon they are funding their retirement plans.
Income investors are looking for new opportunities because low interest rates from savings mean relying on interest on the money for an income is no longer realistic. Consequently, investing for income is becoming a way to gain an alternative flow of income despite the increase in risk.
Look for dividends
And it’s no surprise to learn that a third of income investors started their portfolios in the last two years, suggesting it’s the low interest rates driving demand. These new investors are also more keen to invest in stocks that produce an income.
Share Centre research analyst Helal Miah said: “The power of income investing should not be overlooked, even when the investor is looking for growth.
“People should look to stocks that produce an income as they tend to be from large mature companies distributing a proportion of their earnings.”
Helal also highlighted the fact that reinvesting dividends from companies can produce great results over the long term.
One example illustrates how an investor who had invested £10,000 in BP shares on November 24, 1988, would have received 8,023 shares. The increase in share price alone would have led to that investment being worth £35,782 now.
However, and this underlines the centre’s viewpoint, BP has historically paid investors a dividend and over the same period this amounted to £47,209 – an extra £11,427 in the bank.