Investing for income? Here’s what you should know

Many Australian investors continue to focus on income-generating investments. However, with ongoing market volatility, it’s worth thinking carefully about the way that you allocate to income generating investments in a portfolio.

 As we generally accept, the search for reliable, risk adjusted income is a prominent theme in Australian investing, partly due to an ageing population who are looking to transition to full retirement and seeking to fund their current lifestyle without having to work full time.

As the Australian Government’s 2023/24 Superannuation in Retirement consultation pointed out, over the next 10 years, the number of retirees with a superannuation account will more than double, with an estimated 2.5 million Australians set to retire. But while there’s been a lot of focus on building superannuation, there has been less attention on optimising its role in retirement.

Income-targeted investments can indeed help reach these goals; however, not all income investments are the same in terms of risk and regularity of returns. As an investor, it’s worth thinking about what you want to achieve from the income portion of your portfolio, and the role of diversifying, particularly with the potential for market volatility to arise more regularly.

Capital volatility and its effects

Investor preference is often to head for the domestic share market for the income-producing portion of their portfolio. And while this market is indeed rich in dividend-paying companies, especially in sectors like banking, mining, and telecommunications, it’s worth considering how more diversification for the income portion of a portfolio can play a positive role. Because while yield is an important measure for those seeking income, particularly when in transition to retirement, so is the stability of the underlying capital value.

Ongoing volatility in the public markets – such as we’ve seen in recent weeks – can significantly impact investors’ capital when income seeking in equities. That’s because when money is invested in public markets, the capital is subject to these fluctuations, as is the yield earned on this capital.

That’s not to say there’s anything to avoid with public markets, but that allocating some of your income to fixed income in other markets might be worthwhile considering.

As an investor, you might be aware that private markets are generally less liquid than public markets, but if you are comfortable with this, then you can expect to achieve more capital stability than in public markets which are more prone to volatility.  

If you do allocate part of your income portfolio to income-producing private markets (provided you pick an investment where the underlying asset genuinely produces reliable income – more on that later), then what you will get is consistent, regular income, with little to no variation in capital value.

Understanding income streams

When it comes to income from private debt, there are a few key points for investors to be aware of.

For a start, investing for income and growth goals simultaneously might lead to disappointment. In a general sense, these two goals are counter-intuitive, and can cannibalise each other. They may even encourage an investor to take higher risks to achieve a predefined yield for their portfolio.

For investors looking to invest in private debt to generate an income stream, it is imperative that the underlying assets produce an identifiable regular income. Investors need to be very clear on whether the loan or the fund does pay a regular income stream.

When this underlying asset is property, examples of this regular income include existing residential or commercial mortgages, where the owner-occupier or investor has committed to regular loan repayments. Or it might be an investment with regular income, such as an office tower, shopping centre or hotel.

If the underlying security property is in the process of being developed, it is not likely to be income producing at that time. Again, this is not to say that investing in development assets is to be avoided, just that they are not designed to meet the goals of those wanting a regular income.

Diversification and quality

Of course, there are inherent risks in any kind of investment, whether that’s in the public or private markets.

Having a diversified portfolio of loans underlying your investment can mitigate against the loss of income and capital. If investors are relying on an income stream from one large asset, they may be exposed to concentration risk should that particular asset fall under stress or market conditions turn.

Another way to protect against risk is to be aware of the track record and quality of the investment or manager. For example, Thinktank works with major institutions such as global and domestic banks and credit funds to provide finance to our borrowers and has more than A$5 billion in funding capacity in place at the present time. While as a business, we have never missed a single scheduled interest or principal payment to our funders or investors in our nineteen years of operation.

However, even within our funds it is important to understand which is more suitable for your own needs. For example, Thinktank’s income trust fund is specifically designed for income, with a yield of 7.71% (after fees as at 10 April 2025), and pays income monthly. 

So before making a decision about income producing investments, have a think about what you need and do your research. Have you considered balanced diversification between public and private markets, and again within the different asset classes they offer? Can you be confident in the underlying income stream of your investment? Do you know the manager – their experience and track record?

Australia’s love affair with investment income is only going to grow, however it’s important to think beyond headline numbers to carefully plan your income goals and ways to get there.  

Disclaimer: This article is prepared by Lauren Ryan. It is for educational purposes only. While all reasonable care has been taken by the author in the preparation of this information, the author and InvestmentMarkets (Aust) Pty. Ltd. as publisher take no responsibility for any actions taken based on information contained herein or for any errors or omissions within it. Interested parties should seek independent professional advice prior to acting on any information presented. Please note past performance is not a reliable indicator of future performance.