Predictable returns through income investing
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A steady stream of income is once again becoming a key focus in investment strategies. Recurring income provides financial predictability and can effectively complement a portfolio.
Volatile markets, geopolitical tensions and monetary policy changes have significantly shifted many investors’ expectations. Especially in Switzerland, where the economic environment has been characterized by low interest rates for years and fixed-income investments yield virtually no returns, regular distributions are coming into sharper focus. This is reflected in a greater emphasis on predictable income, for example, to supplement earned income or pension benefits.
Strategies for targeted income generation—often referred to as “income investing”—are designed to address precisely this issue: They combine different investment instruments to achieve regular and, as far as possible, independent cash flows. As a flexible component, such strategies can be specifically deployed in both growth-oriented and defensive portfolios.
Diversified sources of income
A key feature of successful income strategies is the strategic combination of different income components, each with its own risk and return profile. Stocks with high dividend yields are a key component of this strategy. Companies with sound business models and stable cash flows can provide reliable dividends, thereby making it easier to plan for the future.
In a balanced investment strategy, these are supplemented by bonds that provide ongoing coupon payments. By carefully selecting credit ratings and employing a diversified mix of issuers and maturities, investors can effectively manage interest rate and credit risks and aim for a balanced mix of returns and default risks. Real estate investments—such as those made through publicly traded real estate companies or funds—generate regular income from rent payments, which are often based on long-term leases.
Systematic options strategies, such as covered calls or collateralized puts, can generate ongoing option premiums and thus contribute to more stable distributions. They can be applied to equity positions and tangible assets such as gold, and can generate regular returns, particularly in sideways-trending markets. This is offset by a limited upside potential above the strike price.
Quality and structure for predictable income
Income investing is based less on maximizing payout ratios and more on the quality and sustainability of the underlying sources of income. The focus is on investment vehicles with solid fundamentals, reliable returns, and a sustainable long-term structure. These include companies with consistent dividend policies, solid bond issuers, and disciplined option strategies.
In this context, real estate plays an important role, provided it is characterized by high occupancy rates and long-term, secure rental income. Swiss real estate funds are benefiting from stable market conditions and sustained demand. This makes cash flow planning more predictable and serves as a useful addition to the overall portfolio.
Income strategies aim to generate a reliable stream of income with long-term potential, while preserving capital in real terms—that is, after adjusting for inflation. It is important to carefully consider the amount of distributions, as payouts that consistently exceed the rate of return can undermine this objective.
In practice, therefore, professionally managed funds with distribution-paying share classes are often used. By combining different asset classes and distribution dates, cash flows can be smoothed out over the course of the year.
Tax efficiency and net income
In addition to the amount of gross distributions, the individual tax treatment also influences the effective net income. Dividends and interest income are generally recorded as income and are partially subject to withholding tax.
In the case of real estate investments, the tax burden may be more differentiated. Swiss direct real estate funds tax income and assets at fund level, often at a lower institutional rate. Retail investors often benefit from this in terms of income and wealth taxation.
Another aspect concerns option premiums. Depending on the structure of the strategy and the individual tax classification, these may qualify as capital gains, which may be tax-exempt for private investors in Switzerland. Option-based approaches can thus effectively support the current return. Tax efficiency is therefore an additional driver of net income.[1]
Income strategies in practice
Income investing can target a portfolio towards predictable income streams. Diverse sources of income help create a stable income base, but they are still subject to risks and fluctuations in value.
To put this into practice, UBS Asset Management offers a wide range of solutions—from strategies focused on Switzerland to regionally and globally oriented approaches. These include dividend-focused equity strategies, options-based approaches to equities and real assets, income-generating real estate funds, and multi-asset income solutions that combine various asset classes.
Careful selection and alignment to individual goals are crucial. In this way, income investing can become a strategically important component of a portfolio.
Visit our website to learn more about income generating strategies from UBS Asset Management.
[1] This cannot be regarded as tax advice. Investors should seek advice from their own tax advisers based on their individual facts and circumstances.
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