What Is Current Income?
Current income refers to cash flows that are anticipated in the immediate to short-term. Current income investing is an investing strategy that seeks to identify investments that pay above-average distributions. Common current income sources include dividends and interest payments. Dividends are periodic cash payments paid to shareholders by companies. Investment portfolios across the risk spectrum can focus on current income investment strategies that focus on generating short-term income (rather than long-term growth).
- Current income refers to cash flows that are anticipated in the immediate to short-term.
- Current income investing is a strategy that seeks to identify investments that pay above-average distributions.
- Current income-paying securities include stocks, but investors, looking for steady, long-term current income may consider annuities, target-date funds and government and/or corporate bonds.
How Current Income Works
Current income allows businesses and individuals to pay the bills through the receipt of regular and short-term inflows of cash. This may be from work income, revenues from products sold, or through certain investment activities.
Current income investing is a strategy that can provide investors with consistent long-term distributions or payouts for short-term spending. Many long-term, current income-focused portfolios are created for individuals seeking short-term spending payouts and the potential for steady long-term income in their retirement years.
Types of Current Income
There are various types of investment options that investors have at their disposal to create an income stream in a portfolio. Investors can choose individual securities or managed investment funds as well as income-paying securities such as stocks and bonds.
Equity Income Fund Investing
Dividend-paying stocks offer investors higher returns, and generally with higher risks than bonds. As income-paying investments, these securities combine current income with the chance for stock price appreciation.
In the equity market, investors will generally find dividend-paying stocks to be among the most well-established and mature companies. Dividend-paying stocks tend to have steady earnings with reasonable payout ratios. Real estate investment trusts (REITs) are a top investment option for investors seeking current income. A REIT is an investment of company-owned properties that receive rental income from owning those real estate investments. REITs are required to pay 90% of its income via distributions to investors because of their fund structuring.
Funds that invest in many different types of stocks or securities are another great way to invest in current income. Funds can lower the risk in a portfolio through diversification with similar comparative levels of yield. Investors seeking funds for a long-term investment that pay steady streams of current income in the future can also consider annuities and target-date funds.
Debt Income Fund Investing
Debt income securities and investment funds offer a broad range of choices for investors since debt instruments pay fixed income to investors. Investors can invest in a range of local and international government offerings. U.S. Treasuries are popular bond investments that typically pay a fixed interest rate–called a coupon rate–for the life of the bond. Investors also have access to coupon-paying corporate bonds from countries around the world. Debt income funds build on these offerings by providing diversified portfolios of income-paying investments.
Real World Example of Current Income
Annuities typically offer consistent payouts after a specified target date. In November 2019, PIMCO’s RealPath target-date funds were some of the market leaders in return and current income in the target-date category. The PIMCO RealPath 2045 Fund has a one-year return of 14.84% and has a distribution yield of 3% as of November 2019. However, there are various types of annuities while some have very strict rules and requirements. It's important that investors seek help from a financial professional to consider whether annuities are right for them.