What is Current Income?
Setting investment goals is essential to accomplishing financial success. Investment goals differ for each investor and include regular income generation, capital protection, liquidity, and capital growth based on your priority and objectives.
Current income is one such investment goal.
What is Current Income?
The definition of current income is the cash flow generated in the immediate or short-term period.
Businesses and individuals require funds for purchases, short-term debt, direct expenses, and taxes. Sources for current income include salaries, sales, and investment activities.
Current income investing is an investment strategy that focuses on providing consistent and long-term payouts to investors. Current income investing aims to identify investments that generate exceptional distributions.
Dividend and interest payments are the most common sources of current income.
- Dividend - Dividend income refers to the periodic income distribution to shareholders. Companies pay a dividend on preferred and common stock. However, the company is under no obligation to pay dividends to shareholders. The periodicity and quantum of reward vary based on the company's performance.
- Interest Interest or coupon is the return on fixed income instruments such as bonds, debentures, and deposits. Typically, the interest rate and frequency of payment are predetermined.
Debt Income Fund Investment
Debt investments generate stable income for investors at periodic intervals. Debt instruments include government securities, treasury bills, Bonds offered by municipal boards and local authorities, corporate bonds, and fixed deposits. Most debt investments pay a fixed income, referred to as coupon or interest. Debt funds offer a combination of debt instruments, thus creating a well-diversified portfolio.
Real Estate Investment Trusts (REIT)
Instead of investing directly in real estate properties, investors buy units in a managed portfolio of properties. REITs own and manage real estate properties and earn rental income, commissions, and gains from the sale of properties. REITs are obligated to share a majority of net revenue with their shareholders monthly or quarterly.
REIT investors benefit from capital appreciation of the underlying asset, income from leasing, and revenue from operations. They tend to outperform during periods of high inflation due to increased rental income and capital appreciation.
Equity Income Investment
Dividend-paying stocks are a source of current income. For investors with a higher risk appetite, equity income investment is the most preferred source of current income.
Other types of current income include annuities, target-date funds, and systematic withdrawal plans.
Equity Income Fund Investing
Investors can identify dividend-paying stocks among matured and well-established companies. Companies with steady earnings and average payout ratios are ideal. These securities merge current income with the possibility of capital appreciation. Funds investing in multiple stocks or securities help diversify the risk associated with individual securities and generate current income.
For most companies, dividend payout is four times a year upon quarterly earnings release, whereas, for some, it is annually or semi-annually.
Current income investing is a versatile investment strategy with the critical objective of paying the above-average distribution. Investors have an option to apply the strategy to most investment avenues.