Income Securities - Income Securities

A portfolio filled with income securities is designed to primarily produce a steady stream of income for the investor, rather than focus on value appreciation. A good example is the difference between a dividend-paying stock and stock that does not pay dividends. If you purchase stocks in a company with no history of paying dividends, such as Amazon, you hope to make money from this stock at some point in the future, when it has hopefully increased in market price and you can sell it for a profit. If you instead buy stocks in a company with a stable history of dividend payments, such as Coca Cola, you expect dividends to start showing up in your stock account, providing your with a regular income. The stock can still increase in market price over time, but the prime objective for an income-focused investment portfolio is income.

Income securities typically produce an income through interest payments (e.g. bonds), dividends (e.g. stocks), or other distributions (e.g. Return of Capital from a Real Estate Investment Trusts). Income generating securities form the backbone of many conservative investment strategies, particularly for individuals in or near retirement and for institutions with cash flow needs. Unlike capital appreciation assets, which aim to grow in value over time, income securities focus on consistent payouts and capital preservation.

Common Types of Income Securities

The category income securities include many different asset classes and assets, each with different structures, risk profiles, and return characteristics. While some income securities are relatively low-risk and backed by strong issuers, others trade off security for higher yields, exposing the holder to bigger market or credit risks. Both debt instruments and equity instruments can be income securities.

Examples of common types of income securities are bonds, preferred shares, dividend-paying stocks, real estate trust shares, and various fund shares.

Bonds

Bonds are among the most traditional forms of income securities. They represent a loan from the investor to the issuer. The issuer is usually a government (a sovereign state), a corporation, or a municipality. With a classic bond, you get paid periodic interest payments during the lifetime of the bond, and when the bond expires, you get your principal (the amount of money you lent to the issuer) back. With a classic bond, the interest payments and their timing are fixed or determined by a predefined formula, making bonds a favored tool for income predictability.

Government bonds, especially those from stable countries with a high credit rating, are considered low-risk, and they are frequently used in capital preservation strategies. When the economy gets stormy, investors tend to flock to these bonds.

Corporate bonds tend to provide higher yields (interest payments) than government bonds, but with an increased risk of issuer default. Of course, that still depends on the issuer´s individual credit rating, and certain corporations have a higher credit rating than certain sovereign states. Rating institutions classify corporate bonds depending on their risk level. The top-level (most secure level) consists of investment-grade bonds, while the bottom layer is comprised of junk bonds. Junk bonds typically pay high interest rates, otherwise no one would want to touch them.

Municipal bonds are especially common in the United States. They can be backed by the creditworthiness of the entire municipality, or backed by a specific revenue stream, e.g. a local airport. Some municipal bonds come with tax advantages and can be especially useful for tax planning purposes.

What is Gilt?

Bonds issued by the UK Government are commonly referred to as “gilt”. In the past, debt securities issued by the Bank of England on behalf of His Majesty´s Treasury had a gilt (gilded) edge, and this is how the nickname was coined.

The United Kingdom has a high credit rating and gilt is a very popular choice for low-risk bond portfolios.

Preferred Stocks

Preferred stocks (preferred shares / preference shares) are hybrid securities with features of both equity and debt instrument. They are a type of company shares and will pay fixed or adjustable dividends. They have priority over common shares when it comes to income distribution and liquidation rights. However, they usually carry no voting rights.

Because of the dividend feature, preferred stocks are popular with income investors who want the yield of bonds combined with some exposure to equity markets, and do not care about voting rights. Preferred stock prices can be sensitive to changes in interest rates and credit quality, which can affect their market value even though the income remains stable.

A company will issue preferred stock to raise capital, e.g. for an expansion. It is an alternative to issuing common stock (which would dilute the voting strength of existing common stock) or borrowing money through bonds or a bank loan. To entice prospective lenders, preferred stocks are senior to (higher ranking than) common stock in terms of claims, i.e. rights to their share of the company assets. They typically also have priority over common stock when it comes to dividend payments. Important: Preferred-stock holder´s claims are still junior to those of creditors. They are only prioritized in relation to the claims of common stock holders.

Short facts about preferred stock

Just like bonds, preferred stocks are rated by major credit rating agencies, so you can look up their rating before you make a decision.
In some cases, preferred stocks are convertible, which means they can be converted to common stock.
In some cases, preferred stocks are callable, which means the issuer can decide to redeem them in advance, before they have reached maturity.
In many countries, a company can issue several classes of preferred stock, with each class receiving separate rights, e.g. Series A Preferred, Series B Preferred, and so on.

Dividend-Paying Common Stocks

While common stocks are generally associated with capital appreciation, a large segment of the equity market consists of mature companies that distribute part of their profits as dividends, and these stocks can function well in a portfolio of income securities. Dividend-paying companies are especially common in certain sectors, such as utilities, telecommunications, consumer staples, and financials.

Unlike the interest rate on a bond, the company is not contractually bound to pay dividends. Dividend-payments are suggested by the board and voted on at the annual shareholders meeting. A company that has paid dividends in the past can decide to not do it anymore. Companies can for instance reduce or eliminate dividend payments during financial stress or economic downturns. However, long-standing dividend payers (particularly those with a history of increasing payouts year after year) are often considered reliable income producers and they are a popular choice for income-focused portfolios.

Income-Focused Funds

Income-seeking investors can also use funds structured to distribute regular income, including income-focused closed-end funds (CEFs), income-focused exchange-traded funds (ETFs), and income-focused mutual funds. These funds pool capital and invest in income-producing assets. Some of them are using leverage to enhance distributions, but leverage comes with its own set of risks.

While these funds may seem similar at surface level, they are different types of entities, and they each come with their own characteristics and peculiarities. Closed-end funds may trade at premiums or discounts to their net asset value, which can impact returns. ETFs offer liquidity and transparency, and there are many ETFs to chose among, including ETFs with a focus on bonds, preferred stocks, REITs, or dividend-paying common stock.

Actively managed funds adjust portfolios in response to market conditions, while passive funds follow a fixed index strategy. You typically pay a much higher fund fee for an actively managed fund, and there is no guarantee that this cost will be worth it.

What is an ETF?

With an Exchange Traded Fund (ETF), the fund shares are listed on an exchange, and traded in a manner very similar to stocks.

If you invest in a traditional mutual fund instead of an ETF, fund shares are normally only bought and sold once a day, after market close, and you will carry out such transactions with the fund company as your counterpart, as the fund creates and redeems shares. The share price is determined by the fund´s current Net Asset Value (NAV).

With an ETF, it works differently, since the shares are listed an an exchange. Traders can buy and sell shares among themselves, like they do with stocks, and the share price is determined by the market at each instant. Instead of only buying and selling once a day, trading takes place throughout the trading day of the applicable exchange.

Real Estate Investment Trusts (REITs)

Real Estate Investment Trusts (REITs) offer exposure to income-generating real estate. It is a way for you to get exposure to this market without owning real-estate in your own name. For many investors, it is great to not have to deal with all the responsibilities that property ownership entails for an individual. Investing in one or more REITs is possible even if you do not have enough money to purchase real-estate outright in your own name on your desired property market, and if you select well, you can get plenty of diversification form day one.

REITs own or finance income-producing assets such as rental apartments, offices, retail centers, health care buildings, and industrial facilities. In many jurisdictions, REITs must distribute a large portion of their earnings to shareholders, making them a strong candidate for income-focused portfolios.

REITs tend to yield more than traditional stocks but can be more volatile. They can be strongly impacted by interest rate changes, property market cycles, and economic slowdowns. Still, for long-term investors seeking income with some growth potential, REITs can provide an efficient balance between risk and reward.

What is the difference between publicly-traded REITs and private REITs?

REITs can be divided into to main categories: publicly-traded REITs and private REITs. When a REIT is publicly-traded, it means the company shares are listed on a stock exchange and traded there. With a private REIT (non-traded REIT), the shares are instead sold over-the-counter, usually through broker-dealers or direct placements.

Publicly-traded REITs are also known as listed REITs, as they are listed on stock exchanges.

What is the difference between Equity REITs and Mortgage REITs?

The Equity REIT is the most well-known type of REIT. This type of REIT own and operate income-producing real estate.

A Mortgage REIT works differently. Instead of investing in real estate directly, it invests in real estate debts. The REIT can buy mortgage-backed securities or originate loans themselves, or both.

A third type of REIT is the Hybrid REIT, which both owns real-estate and invests in real-estate debt.

Generally speaking, Equity REITs tend to be more stable than Mortgage REITs, as Mortgage REITs are more sensitive to interest rate changes, credit spreads, and default risks. In exchange for higher risk and more volatility, investors in Equity REITs expect higher yields.

What is a REIT ETF?

Instead of investing directly in a REIT, investors can buy shares in an exchange-traded fund (ETF) that invest in REITs. This can make it easier to attain a high degree of diversification, and some investors also prefer owning ETF shares instead of REIT shares for tax-management reasons.

Master Limited Partnerships (MLPs)

Master Limited Partnerships (MLPs) operate primarily in the energy and natural resource sectors. They offer high yields by distributing cash flows directly to investors, who are treated as limited partners. The structure allows for favorable tax treatment but adds complexity to tax reporting. MLPs are not suited for all accounts and should be evaluated carefully for fit within a broader portfolio.

Income Securities and Interest Rate Sensitivity

One of the central risks associated with income securities is interest rate sensitivity. Fixed-income securities, preferred stocks, and REITs often fall in value when interest rates rise, since new securities will likely offer more attractive payouts. The duration of a bond (how long until its maturity) affects how much its price will move in response to changes in rates.

Income Securities and Inflation

Income-focused investors must manage inflation risk. If the income generated does not keep pace with the rising cost of living, the real value of returns diminishes over time. Some income securities, like inflation-protected government bonds, attempt to offset this risk.

Credit Risk

Any income security is only as reliable as the entity issuing or backing it. The creditworthiness reflects the issuer’s ability to meet its obligations, and major issuers will have a credit rating from one of the major credit rating agencies. If the issuers is downgraded by one ore more rating agencies, is missing payments, or otherwise develop a worse reputation than before, it can severely affect the market value of the security.

Liquidity Risks

Liquidity is another factor. Some income securities, especially those from smaller issuers or in emerging markets, may be difficult to sell quickly without taking a loss. Funds with complex or less liquid holdings can also face redemption risks or trading premiums/discounts.

Tax Considerations

Income from income securities may be taxed differently depending on its source and the jurisdiction of the investor. Interest payments from bonds are often taxed as ordinary income, but some governmental or municipal bonds may come with preferential tax treatment to make them more enticing to investors. Dividends may qualify for lower tax rates, but not always. Distributions from REITs and MLPs can include a mix of ordinary income, return of capital, and capital gains, each with different tax treatment.

Income-seeking investors need to structure their portfolios with these differences in mind. Using already tax-advantaged accounts to hold your income-focused investments adds another layer.

It is very important to know what the rules are in your jurisdiction, and in your particular situation, instead of simply assuming that tax law is the same all over the world (it is very much not).

Portfolio Role and Suitability

Low-risk income securities are commonly used by investors with regular cash flow needs and a conservative risk profile, but low-risk income securities are also added as a diversifiers to balance higher-risk assets in a portfolio. In a diversified portfolio, they can reduce volatility, act as a ballast during downturns, and provide rebalancing options without liquidating capital growth positions.

High-yield, high-risk income instruments fits a very different niche than gilded bonds and investment-grade corporate bonds, and we will typically not find them in conservative portfolios, unless they are used in very small quantities to provide some spice.

Over-reliance on income securities (both low-risk and high-risk) can leave a portfolio underexposed to long-term growth and vulnerable to inflation or interest rate changes. The goal is to achieve balance that aligns with your goals and preferences.

Suitability for Different Investors

Low-risk income securities often make sense for:

Retirees or near-retirees needing dependable income
Investors seeking to reduce portfolio risk or balance equities
Institutions with predictable liabilities or payout obligations
People prioritizing cash flow over capital growth, and this group may also want to add some higher-risk, higher-yield income securities to their portfolio.

They may be less effective for:

Young investors focused on growth
Portfolios that need to outpace inflation over long periods
Aggressive strategies looking to exploit price dislocations or momentum
Situations where the income stream is taxed inefficiently

In the wrong context (such as a 25-year-old holding 80 percent of a retirement portfolio in government bonds) income securities can underperform dramatically. In the right context, they provide financial stability.

Are Income Securities Good Investments?

Income securities can be good investments, but only when they fit the investor’s financial targets, risk tolerance, and time horizon. They serve a very specific role in a portfolio: delivering consistent income through interest payments, dividends, or distributions, usually with a focus on capital preservation rather than growth. Their value isn’t universal. What makes them good for one person may make them less suitable for another.

Their reputation as “safe” or “conservative” investments is generally true relative to more volatile assets like growth stocks or speculative instruments, but that doesn’t mean income securities are risk-free. Evaluating whether they’re good investments means understanding both what they do well and where they fall short, and we must also keep in mind that this is a very large and heterogeneous category.

Where Income Securities Excel

The biggest appeal is predictability. Income securities, especially bonds, preferred shares, and dividend-paying equities, offer steady returns that investors can often count on regardless of market direction. For retirees and institutions that need cash flow without selling assets, this reliability is central. Fixed coupon payments, scheduled dividend distributions, and long-term visibility into cash flow make income securities a core holding for anyone prioritizing financial stability over the possibility of rapid appreciation.

Income securities also tend to have lower volatility (although there are many exceptions). High-grade bonds or blue-chip dividend stocks don’t typically experience the same price swings as growth stocks or alternative assets. This helps soften portfolio drawdowns during bear markets and creates balance alongside more aggressive investments.

In portfolio construction, income securities are a source of diversification. Their performance often responds differently to economic cycles than the general stock market. Bonds, for instance, may rise in value during periods of economic weakness when interest rates fall, offsetting declines in the stock market. Certain income vehicles like REITs offer exposure to specific market sectors while focusing on yield.

The Risks That Come With Yield

The steady nature of income securities does not mean there’s no risk. One of the most common mistakes is chasing high yield without understanding the underlying risk that comes with it. Higher yields often mean higher exposure to credit risk, interest rate risk, and/or sector-specific volatility. A junk bond yielding 10 percent may sound appealing, but if the issuer defaults, the investor could lose both income and principal.

Interest rate sensitivity is another factor that can turn income securities into poor investments in certain environments. When interest rates rise, the value of fixed-income securities tends to fall. This affects not only government and corporate bonds, but also preferred shares and REITs. The longer the maturity or duration of the security, the more severe the price impact.

Inflation can erode the real value of the income stream. A bond paying 3 percent may lose its appeal in a 5 percent inflation environment, effectively delivering negative real returns. Unless inflation-linked securities like TIPS are included, income portfolios can struggle to keep pace with the cost of living.

Liquidity risk also needs to be considered. Some income securities, especially in emerging markets or those issued by small companies, may be hard to sell in adverse conditions. Closed-end funds or MLPs might trade at steep discounts or be difficult to exit quickly.

Tax Treatment Matters

It is important to know how income-securities will be taxed, and how they will impact your overall tax situation.

Here are just a few examples of factors to consider:

In some jurisdictions, interest payments from bonds are taxed higher than ordinary income rates.
In the U.S., certain municipal bonds have favorable tax-treatment, and can even be used for some clever tax-planning that impacts a person´s overall tax situation.
In some jurisdictions, qualified dividends from equities benefit from lower capital gains rates.
Zero coupon bonds do not pay interest during the life of the bonds. Instead, investors buy a zero coupon bond at a deep discount from its face value, and the face value is the amount the investor will get when the bond matures. Exactly how this is treated from a tax-perspective can vary from one jurisdiction to the next.
MLPs and REITs can add another layer of tax complexity, as their payouts often include return of capital and require a more detailed tax filing.
Holding certain income assets in tax-advantaged accounts can mitigate some of the impact.
If you are tax-liable in Jurisdiction A but receive income derived from investments in Jurisdiction B, planning ahead becomes especially important.

How to Invest in Income Securities

Investing in income securities means building a portfolio that generates consistent cash flow through interest payments, dividends, or distributions. Low-risk income securities are favored by people who want reliable income, e,g. retirees, conservative investors, or those balancing risk across a broader strategy. For UK-specific guidance, fund breakdowns, and income planning resources, investing.co.uk is a strong starting point.

Income securities are not flashy, but they offer steady returns and can serve as the foundation of a disciplined investment plan. Higher-risk, higher-yield income securities attract investors with other investment goals and risk tolerance levels.

If you want to put together an income-focused portfolio, it is important to put some effort into learning more about how to start, what to choose initially, and how to manage these investments over time. Just randomly buying income securities based on gut feeling or hype is rarely a good idea. Income securities come in different forms, each with its own risk and reward profile, and investing in them effectively means more than just buying a bond or a stock with an attractive-looking high dividend.

Define Your Income Needs and Risk Tolerance

Start by clarifying what you want the income for. Are you supplementing retirement, and when will your retire? Are you planning to reinvest the income for growth? Are you investing to fund a major purchase in five years? Something else? Your answer determines which types of income securities that will make the most sense.

Alongside purpose, evaluate your risk tolerance. High-yield bonds and REITs may pay more, but they come with increased risks, e.g. credit risk and market volatility. In some cases, they also bring complex tax treatment. On the other hand, government bonds from stable economies and investment-grade corporate debt are safer investments, but offer lower yields. Knowing how much volatility you can handle will steer your choices.

Understand the Different Types of Income Securities

Before investing, get familiar with the main categories:

Government Bonds: Also known as sovereign debt instruments. They pay regular interest and are among the lowest-risk options, provided the issuer has a high credit rating. U.S. Treasures are lower risk than bonds issued by Mali, and so on. Inflation-linked bonds (like TIPS) are great for stability, but they usually offer lower yields.
Municipal Bonds: Issued by local governments (not sovereign states). In some cases, their interest is tax-exempt, or they come with some other tax-advantage that has been built-in to make them more appealing to investors. In the U.S., they are often tax-free at the federal or state level. It is important to know if they are backed by the entire municipality or only by a certain asset or revenue stream. Are sometimes used for tax-planning by high earners.
Corporate Bonds: Issued by companies. Higher yield than government debt, but with added credit risk, at least compared to U.S Treasuries, UK Gilts, and similar. Choose investment-grade for safety, and high-yield (junk) for more risk-tolerant parts of the portfolio.
Preferred Stocks: Hybrid securities that pay dividends. Often pay more than bonds, but tend to react strongly to both interest rates, company performance, and company credit rating.
Dividend-Paying Common Stocks: Common shares of established companies with a history of paying dividends are a popular choice for income-portfolios, as there is also the potential for growth (exposure to the stock market).
REITs: Real estate investment trusts (REITs) own or finance income-producing properties. High dividends, but tied to real estate market swings. Sensitive to interest-rate changes. Real estate investment trusts are usually legally mandated to pay out a high percentage of income. They tend to be higher yielding but more volatile than government bonds.
Income-focused Closed-End Funds, income-focused Mutual Funds, income-focused ETFs, and similar: Pooled investment vehicles that hold baskets of income-producing assets. An easy way to achieve a high degree of diversification from day one, even with a small investment. Often pay monthly or quarterly. Come with management fees. You do not own the income-assets, only the fund shares.

Choose the Right Investment Accounts

Where you hold income securities matters. Interest and non-qualified dividends are often taxed as ordinary income, but holding these assets in a tax-advantaged account (like a traditional IRA, Roth IRA, or 401k in the U.S.) can shield or defer those taxes. Look for what type of tax-advantaged accounts, if any, that are available in your jurisdiction.

If tax-advantaged accounts are not an option, consider focusing on tax-efficient income sources such as qualified dividend stocks or municipal bonds (depending on the jurisdiction). Ideally work with a skilled tax advisor.

Build a Diversified Income Portfolio

Avoid putting all your capital into one income category. Spreading your assets across different income sources helps manage risk and can improve stability when done right. For example, pairing short-term government bonds with REITs and dividend-paying stocks creates a balance between safety, inflation protection, and yield.

You can use a laddering strategy with bonds, i.e. buy securities that mature at different intervals. This allows you to reinvest periodically at current market rates without locking all your money into one interest environment.

If using funds or ETFs, evaluate the portfolio’s composition, yield, duration, credit quality, and management fees. Some income funds use leverage to increase yield, which adds risk. Know the details before committing.

Pick the Right Broker / Investment Platform for You

Most income securities can be purchased through standard retail brokerage accounts. Bonds can also be bought directly from government portals or through the secondary market. Dividend stocks, REITs, and fund shares are traded like other securities. For those exploring more active trading options alongside income-focused holdings, DayTrading.com offers useful insights into short-term strategies and platform comparisons.

Examples of points to keep in mind when selecting a broker and investment platform:

Is it trustworthy, and licensed and supervised by your national financial authority?
Does it have a good reputation among other retail (non-professional) investors?
Is it suitable for creating and holding long-term investment portfolios?
Will you get access to the asset classes and exact assets that you want?
Is the cost structure clear and suitable for your strategy?
Can it be easily combined with tax-advantaged accounts, such as IRA:s (in the U.S.) or ISAs (in the UK)?
Will it generate the required tax reporting documents automatically for you?

Note: For more complex income strategies involving things such as international debt or MLPs, you may need a full-service broker or a platform with expanded access.

Monitor and Adjust, and Reinvest or Withdraw Strategically

Review your income strategy at least annually to ensure it still aligns with your financial goals, tax situation, and market conditions. Income investing isn’t set-it-and-forget-it. As interest rates, inflation, and your financial needs shift, so should your portfolio. Rising rates can hurt long-duration bonds. Economic slowdowns can lead to dividend cuts or REIT underperformance. Track your income yield, watch for credit downgrades, and stay informed about sector-specific risks. Trim or reallocate as needed to keep your income stable and aligned with your tolerance for risk.

You also continuously need to decide how to best use the payouts. If you’re still in the accumulation phase, reinvesting is often a great choice, as the income can increase compounding and grow your total return over time. If you’re in retirement or drawing income, use a sustainable withdrawal strategy. Many investors match distributions with living expenses, keeping the principal intact. Others combine income with occasional capital gains harvesting to maintain flexibility.

How to Choose the Right Income Securities for Your Portfolio

Choosing the right income securities means balancing the need for consistent cash flow with the realities of risk, market movement, and long-term financial goals. There’s no universal answer, and what’s ideal for a retiree living off dividends might be a bad fit for someone saving aggressively in their 30s with a long time horizon. Income securities span everything from low-risk government bonds to high-yield corporate debt, each offering different payouts, behaviors, and risks.

The key is understanding not just how much income you want and need, but how much risk you can realistically handle to get it. The right income security is the one that matches your need for yield with your tolerance for loss and uncertainty.

Know What You Want the Income For

Start by asking one question: what’s the income actually for? Is it to pay monthly expenses in retirement? Reinvest and grow over time, as a cushion for a rainy day? Replace a paycheck? Supplement a fixed pension? If the income is meant to cover essentials like housing or food, you’ll need high reliability, i.e. securities with steady payouts and low credit risk. Government bonds or blue-chip dividend stocks might fit here. If the goal is to reinvest and grow, you can afford more volatility. High-dividend ETFs, REITs, or a ladder of corporate bonds may suit that scenario better, and can be permitted to take up a larger part of the portfolio.

Understand Your Risk Tolerance and Time Horizon

There’s no return without risk, and higher-yielding securities usually carry more of it: credit risk, market risk, interest rate risk, liquidity risk, etcetera. Generally speaking, the safer the income (and asset value), the lower the yield. If you panic at every market drop or can’t afford a missed payment, you need to stay toward the conservative end of the spectrum. But the longer your time horizon, the more room you have to tolerate short-term price swings in exchange for better income potential, and even risk-averse investors can usually see the truth in this. Even a risk-averse investor in their 40s saving for retirement might feel okay investing some money in REITs, while even a dare-devil might decide to own more short-term government bonds and fixed-income funds as they enter their 70s.

Look at Yield, But Also Beyond It

Chasing yield without context is a common mistake. A bond yielding 10% from a company on the edge of bankruptcy is not a smart play. Always check what’s backing the payout. A 4% yield that’s safe and repeatable is far better than a 10% yield that disappears after one payment.

Also learn about the different terms used within this field, to make sure there is no confusion when you make your decisions.

Current Yield: The annual income divided by current price. It’s a snapshot, not a guarantee.
Yield to Maturity: For bonds, this is the total return if held to the end. It reflects interest payments plus any capital gains or losses.
Dividend Sustainability: For stocks and REITs, look at payout ratios. If a company is currently paying out too much in relation to its overall economic health, it is more likely to stop dividend payments in the near future.

Match the Security to the Right Account

Tax efficiency matters and it will vary from one jurisdiction to the next, so make sure you are using the right information when you make your decisions. Interest from bonds is often taxed as regular income. Dividends may qualify for lower tax rates. Municipal bonds can be tax-free. MLPs and REITs have complex tax treatment. If you’re holding income securities in a taxable account, look for tax-advantaged income sources. In tax-advantaged retirement accounts, we can usually focus more on the risk and income profile.

Diversify

Never rely on just one issuer nor just one industry. Preferably also diversify over several different geographical markets. If your entire income stream comes from U.S. energy stocks, one regulatory change or price shock could cut your income in half. Blend corporate and government bonds. Mix dividend stocks from multiple sectors. Manage your geographical exposure. Add REITs or international income funds for balance.

Pay Attention to Fund Costs

Funds can come with fund fees and other costs, and some of the costs may be poorly advertised. Always look at the overall structure before you make a decision. Examples of points to consider are expense ratios, sales loads (in mutual funds), and fund management fees. A fund yielding 5% with a 1.5% expense ratio is not as attractive as a 4% fund with 0.2% costs.

Review and Adjust Regularly

Income investing isn’t static. Interest rates change. Dividends get cut. Companies restructure. Bond issuers get downgraded. A security that made sense two years ago may not today. Also, your own life and economic situation will go through changes. Review your income portfolio at least once a year. Check whether yields are still competitive, whether the risks remain acceptable to you, and whether the income still meets your needs. Adjust allocation, rebalance, and reinvest with the same scrutiny you used to build the portfolio in the first place.

Are Income Securities Good for Retirement?

Income securities can be a great choice for retirement savings and they’re often a central pillar of retirement planning. When done right, an income-focused portfolio can provide something many retirees value a lot: a steady, predictable cash flow. That reliability makes them an essential counterweight to the uncertainty of markets and the rising cost of living. But as with any financial product, they’re not a one-size-fits-all solution, and there are always risks to consider. The usefulness of income securities depends on the retiree’s needs, risk tolerance, income requirements, and broader portfolio design.

Why Many Retirees Use Income Securities

Retirement changes the nature of investing. Instead of building wealth, the focus shifts to preserving capital and turning it into dependable income. Income securities (whether bonds, preferred shares, dividend-paying stocks, REITs, or something else) can offer structured payouts at regular intervals. That’s money to cover housing, medical costs, travel, or just basic day-to-day expenses.

Unlike growth investments that rely on price appreciation, income securities are built around regular disbursement. That can make budgeting more predictable and allow plan ahead. The psychological comfort of receiving income without needing to sell assets is also important, especially during volatile market periods.

One of the main risks in retirement is sequence of returns risk, i.e. the danger of withdrawing money during a market downturn early in retirement, which can permanently damage a portfolio’s longevity. Income securities help manage this by reducing the need to sell assets when markets are down. The retiree can continue living off interest or dividends while waiting for markets to recover.

Low-risk income securities are commonly used to reduce overall portfolio volatility, which is crucial when there’s not much time available to rebuild lost capital. Government bonds, high-grade corporate debt, and preferred stocks in well-established companies tend to be less volatile than the general stock market, providing a smoother ride when other assets may fluctuate sharply.

Examples of Income Securities Commonly Used in Retirement Portfolio’s

Government bonds for stability
Municipal bonds for tax-planing, when applicable
Corporate bonds for higher yields (with some added risk)
Dividend-paying stocks for a mix of income and inflation-beating growth potential
REITs for real asset exposure and attractive yields
Preferred shares for prioritized dividends
Funds for simplified diversification

A combination of instruments allow retirees to create layered income streams, sometimes called bond ladders or dividend buckets, making income is more likely to keep showing up in your account even during scary market conditions.

Limitations to Watch For

While income securities solve many retirement challenges, they also bring risks and limitations that retirees and soon-to-be retirees should not ignore. Over-concentration in one type of security adds a level of risk that many retirees aren’t well positioned to absorb. Income investing works best when paired with some growth exposure to equities, enough liquidity to handle emergencies, and a withdrawal strategy that doesn’t rely solely on distributions. Some retirees follow a bucket strategy, where different asset types are allocated to short-, medium-, and long-term needs. Income securities often fill the near-term and mid-term buckets, delivering funds while allowing growth assets to work over a longer time horizon.

Examples of key points to keep in mind:

Interest rate sensitivity. When rates rise, the value of existing fixed-income assets drops. This is especially problematic for long-term bondholders or those in funds with longer duration.
Inflation risk. If the income from these securities doesn’t keep pace with the rising cost of living, purchasing power erodes. A portfolio yielding 3% might not be much help if inflation is 5%. This is why some retirees pair income securities with equities, commodities, or inflation-linked bonds to preserve real value.
Credit risk becomes more relevant if the investor is chasing yield with high-risk bonds or under-researched stocks. A default or dividend cut can leave gaps in income and potentially devalue the capital itself.

Tax treatment also matters. Interest from bonds is usually taxed as ordinary income, which can be a burden in retirement depending on the overall tax bracket. Holding income assets in tax-advantaged accounts like IRAs, ISAs or RRSPs can help mitigate this.

What is the 60/40 Rule for Conservative Investment Portfolio?

The 60/40 concept emerged in the 1950s as a rule-of-thumb for investors wishing to balance the potential for growth from stocks with the stability and income that bonds (especially high-grade government bonds) can provide. The idea is to compile a portfolio where 60% of the value is equities and 40% of the value is bonds. As the securities change in market value, you will need to rebalance the portfolio, e.g. once a year, to ensure to maintain the 60/40 ratio.

The 60/40 concept grew out of Harry Markowitz´s modern portfolio theory (MPT) and reached mainstream acceptance in the 1970s and 1980s. For decades, it has been hailed as the appropriate approach when creating a portfolio designed to produce moderate returns without taking on more than moderate risk.

Many investors, both individuals and professionals, still stick to the 60/40 concept for conservative investment portfolios, but the concept is not without its detractors, especially post-2022. The underlying assumption behind the 60/40 concept is that stocks and bonds will move in opposite directions. When the stock market is falling, investors will flock to the bond market, and vice versa. Therefore, falling stock prices in your portfolio will be cushioned by the bonds. In 2022, this old assumption received some serious injury, as concerned investors saw both their stocks and their bonds drop in value at the same time. For many, it became clear that simply diversifying by owning 60% stocks and 40% bonds is not enough. This type of shallow diversification will not protect us when both markets are falling together.

In many parts of the world, the first two decades of the 21^st century were characterized by low interest rates, low to no inflation, steady growth, and predictable central bank policies and actions. As these underlying conditions shifted and changed in 2022, we began to see some pretty serious cracks in the 60/40 model. In hindsight, analysts have pointed out that one of the reasons why bond-heavy portfolios tanked in 2022-2024 was an over-concentration of long-duration government bonds. When interest rates rose, these long-duration debt instruments sank, and many portfolios that had been considered very conservative turned out to be exceptionally sensitive to interest rates.

An investor who wants to strike an optimal balance between income, growth potential, and value-preservation in their retirement portfolio is therefore advised to look beyond the 60/40 model. As we continue navigating through shaky economic times, a deeper understanding of diversification will be required.