Clients Are Craving Income. Here’s How Advisors Are Delivering

Income investing is gaining popularity as climbing interest rates have fueled bond fund inflows on a record pace, according to a State Street report. Dividend funds saw nearly $20 billion in assets flow in during the first half of the year, while derivative income funds brought in over $32 billion. Advisors can help clients build a diversified income strategy by introducing new income-generating products, but they must remind clients that yield isn't the only factor.

Just because a 5% or 6% yield is achievable doesn't guarantee it will be sustainable for a retirement lasting 20, 30, or 35 years, especially when considering inflation. Investors nearing retirement are especially focused on income to cover daily living expenses, particularly if they lack sufficient savings and face a potentially long retirement period.

Some investors are wary of risk and believe the market may be near its peak, seeking alternative ways to generate income beyond capital appreciation from stocks. Advisors can now offer a wider range of income-generating options, including private credit, covered call or dividend ETFs, and other products that were previously limited to institutional investors.

While private credit can offer higher yields, it comes with liquidity risk as these assets are not as easily sold as public bonds. Advisors should conduct thorough due diligence before investing in private credit and consider a more conservative approach to minimize risk. For investors who prefer liquidity, equity-based income products can offer exposure to market growth while providing income.

Preferred stocks and dividend ETFs focus on mature businesses, offering a safer income source with characteristics similar to bonds without the volatility of common stocks. However, investors must monitor the performance of the underlying stocks, as high dividends do not always correlate with growth. Covered call or dividend ETFs can provide upside potential but may lack tax efficiency, particularly for investors in non-qualified accounts.

A balanced approach to income investing may involve focusing on growth to combat inflation, with a portion of the portfolio allocated to generate income. Advisors should consider investors' risk tolerance and the potential for market downturns when recommending complex income strategies. While fixed income and public bonds remain essential, investors should carefully weigh the benefits and risks of income-generating products before making investment decisions.