The Golden Era of Income Investing

The Changing Landscape of Income-Focused Investing

While new investment products are constantly being launched, there is often not a great deal of innovation or differentiation to truly set one investment apart from another. However, there is a growing segment of newer “alternative investments” that has particularly changed the landscape of income-focused investing.

A New Breed of High-Yield Investment Opportunities

These newer investments function like a “dividend fund on steroids”, while also allowing investors to diversify beyond just stocks and bonds, and still earning monthly income. Paying much higher yields than traditionally available, they can change the math on what is possible with an investment portfolio, and can also be a game-changer for retirement income planning. Annualized yields of 7-12% are possibly attainable, with some of the newest and highest-yielding investment options paying as high as 20-25% annualized distributions, apart from the possible fluctuation of the underlying investment

The Tax Efficiency Advantage

Aside from being able to generate income at a much higher level than traditional investments, they can also inherently be tax-efficient, or they can be held within a TFSA to provide a recurring source of tax-free income. This can allow an investment portfolio to function as a low-effort, tax-efficient source of passive income. This strategy could  generate a return on an investment portfolio that is comparable to owning a rental property, with none of the commitments or responsibilities of being a landlord (https://cushrealestate.com/landlording-101-pros-and-cons-of-becoming-a-landlord/). When thoughtfully structured, well-diversified portfolios have the potential to generate double-digit yields while maintaining relatively low levels of volatility..

What are these alternative investment strategies, and how do they work?

Option Writing

One of primary alternative income-producing strategies involves writing (or selling) options contracts to earn option “premiums” (a form of income). Similar to when you buy insurance and pay a “premium” to the insurance company, when you write options contracts, the buyers of those options pay you a premium. Option writing is a strategy that can generate approximately 1% (or more) on a repeatable monthly basis, and option premium income can complement market growth, offset downside risk, or be received as cash to provide a source of monthly income.

Options can be written different underlying assets

Stocks, bonds, and even cryptocurrencies. Whether you want to focus on investing in the S+P 500 index, government bonds, gold-mining stocks, Bitcoin, or individual shares of Tesla, there are investment vehicles that give you that desired exposure plus a monthly distribution generated from option writing. Generally, the more volatile the underlying asset, the bigger the option premium and higher the level of income that can be generated. Different option writing strategies can used to adjust between focusing more on generating income and having less growth potential, or having more growth potential and producing less income.

considerations

The main drawback with option writing is you usually give up some of the potential upside compared to just owning the underlying asset, but mutual funds and ETFs that use option writing strategies tend to have less volatility than just owning the underlying asset the options are being written against. This may come as a surprise to those who associate stock options with being highly risky or speculative investments. As well, writing options is not something for novice investors and is something best left for professionals who can manage more complicated strategies, so it is advisable to invest in a fund or ETF that is managed by someone with experience in the area as opposed to doing it yourself.

Real Estate

This is not referring to actually owning and renting out real estate, but from providing short-term financing for apartment and/or condo development. These investments essentially lend money as short-term loans to real estate developers and builders, and they pay interest on what they’ve borrowed (plus eventually paying back the principal). Investments of these nature tend to have no correlation to stock or bond markets, and some even maintain a fixed unit value while paying out interest on a monthly basis. Yields are generally higher than High Interest Savings accounts and GICs, while also typically offering regular liquidity

A common feature between all these various investments is the income that is distributed monthly can either be reinvested, or it can be paid out and taken as a cash payment. Reinvesting the distribution buys more units, helping the investment grow in value more, and also resulting in ever-increasing monthly distribution as you keep acquiring more units that each pay a monthly distribution. Receiving the distribution in cash provides a form of passive income, while the initial investment can potentially maintain its value as no units are sold to fund the monthly distributions, and the monthly distributions should likely stay constant as you maintain owning the same number of units.

Important Details

• Similar to dividends, income distributions are not guaranteed. They may be suspended or decreased, but they may also be increased over time as well.
• Principal values of the investments are not guaranteed. Unit prices of the investments will fluctuate based on the underlying investments, and can decrease depending on what the underlying investment is. Consequently, they may also rise slightly over time as well.
• Liquidity may occasionally be restricted. Certain funds may prohibit withdrawals in extraordinary circumstances, such as when Covid “lockdowns” were imposed. If buying and holding to receive income over the long-term though, this may not be a significant concern.

One other important thing to note is this newer realm of investments is generally not available through mutual fund-only advisors, as most of these strategies are only available in an ETF structure, or require licencing to be able to provide “liquid alternative” mutual funds.

Interested in Learning More?

If you would like to learn more about harnessing the power of his new breed of income-producing investments, please reach out to me and I’d be happy to discuss these options further with you

This information has been prepared by Dennis Rubeniuk who is a investment Advisor for iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this post comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors.

iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Canadian Investment Regulatory Organization. iA Private Wealth is a trademark and a business name under which iA Private Wealth Inc. operates

‍

‍

‍

‍