Low growth and low interest rates have become the norm in the developed world and anyone still in cash should consider taking on a little more risk to get better returns. There is no magical way of earning more interest: a higher income means taking on greater risk.
If you cannot afford to lose money then taking risk is a bad idea, but if you can afford to risk some money or you already have a portfolio of investments, other sources of income will be attractive.
High yielding equities has been the most successful of income generating strategies. Many people worry that by taking more risk they could lose their investment but fund managers protect capital by being more cautious in their choice of stocks and typically looking for those that will provide steady capital growth rather than stellar returns.
Defensive stocks provide relatively constant dividends and stable earnings irrespective of economic conditions. Blue chip pharmaceutical and tobacco stocks are often described as defensive because people don’t stop needing life-saving drugs or quit smoking when the economy is going through a bad patch. Therefore, these companies are less likely to suffer a big drop in earnings and still have cash to pay dividends.
Income-based investing helps performance when equity markets are collapsing such as in August and September 2015.
Many high-yielding stocks are defensive in nature. A company paying a good and rising dividend is less likely to have its shares dumped wholesale in difficult markets because dividends ultimately come from earnings and profits. This income helps to compensate investors for any loss of capital value. Therefore, income investing tends to be less volatile than the equity market as a whole.
When these companies attract investment, the price goes up and the dividend yield comes down. The equity income manager will often sell, looking to reinvest in the next high-yielding opportunity. Equity income managers’ strategy therefore causes them to buy shares when they are cheap and sell when they are expensive.
Because they are volatile, equity investing is not suitable for everyone but exposure to this sector, even for small amount of your capital, can literally pay dividends over time.