How can we generate a passive income from £350,000?

A reader asks: We recently sold a UK property and are looking to invest the money (£350,000) to produce a monthly / quarterly income. We live in Cyprus and do not pay UK tax as we do not reside in the UK. We have an additional £2.5m in various investments/ shares / bonds / pensions etc which we currently take no income from. We are both under the UK state pension age. Wondered if you had any advice / recommendations?

A couple of things first; 1) by a quick calculation, the recent sale of your property gives you cash representing around 14% of your liquid assets. This is relevant as your overall net worth should be reflected in any recommendations; and 2) also assuming it applies here, it is worth highlighting that Cyprus has a 17-year income tax free window on foreign income and no capital gains tax.

Now, based on the information provided, you currently have £2.5 million in various investments, structures and pots. We are assuming these investments are fully diversified and aiming for capital growth (as you aren’t taking any income from it). Your stated aim from the pot of £350,000 is for income generation.

Rob Morgan, chief analyst at Charles Stanley, pointed out that when investing for income you are going to need to decide on your income strategy, method of taking income and how much.

“Taking income means you don’t benefit as much from the compounding of returns compared with investing for growth, which means getting your strategy right from outset is very important – especially if you are relying on this income,” he said.

There are two main approaches, both of which are perfectly valid: invest for ‘total return’ and withdraw what you need each year; or invest in income-producing assets (dividend-producing equities, bonds, property etc.) and take the ‘natural income ’ these investments produce.

Morgan said: “The natural income approach can restrict you in terms of maximising returns. This is because non-yielding or low-yielding assets would be excluded if you are maximising income – and they might perform better than income-producing assets..

“However, the natural income approach means you are never selling capital (provided that the income alone meets your needs), and it ensures this remains intact to generate future income – so it’s a good idea to use at least some income generating funds at the core of a portfolio designed to provide you with regular withdraws.”

With that in mind here’s some funds to consider – though the make-up of any portfolio will depend on the amount of risk you are happy to take.

1. Multi-asset income fund

Ninety One Diversified Income could be a consideration as a larger, anchor position in an income portfolio. The managers blend what they see as the most attractive opportunities in bonds, equities and, at times, other areas such as listed property investments and

infrastructure. The fund lies in the Investment Association Mixed Investment 0-35% Shares sector, which means it predominantly invests in bonds to meet its objectives and generate an attractive income.

2. Equity income funds

“Blending a multi-asset fund with some equity income funds could result in a simple portfolio that produces an attractive and sustainable income,” said Morgan.

Three funds he likes are:

• M&G Global Dividend, which invests globally in businesses that have the potential to grow payouts significantly over time;
• Artemis Global Income, which offers a portfolio atypical of an equity income fund with more cyclical and economically sensitive business included;
• Trojan Global Income, which is a more defensive fund investing in resilient businesses that are well-placed to grow their earnings and dividends regardless of the economic cycle.

3. UK funds

“The UK boasts an array of dividend champions that makes it an unexpected powerhouse for consistent income and strong overall returns. There are many stable, blue-chip businesses combining healthy pay outs with buying back shares, a process which reduces the number in issue and boosts value,” said Morgan.

One consideration is Temple Bar investment trust managed by Ian Lance and Nick Purves of Redwheel Asset Management. The managers adopt a disciplined approach targeting businesses offering a combination of attractive valuations, strong cash generation, and sustainable dividend growth. Alternatively, iShares UK Dividend UCITS ETF offers a passive ETF option in this area.

4. Infrastructure

It’s also worth considering infrastructure assets to provide a high income that often has an inflation linkage – as well as extra diversification. “Broad investment trusts such as International Public Partnerships invest across a range of infrastructure assets in the UK and overseas,” said Morgan, pointing out the underlying investments “offer good visibility on long-term cashflows and underpin the trust’s ability to grow its dividend”.

5. Higher risk

There’s also a few off-the-beaten-track investment ideas for the smaller and more adventurous part of an income portfolio such as JP Morgan Emerging Markets Income and BlackRock Frontiers that Morgan highlighted as they “offer a combination of income yield and growth prospects from emerging markets and – typically even riskier – frontier markets respectively”.

6. Lower risk – the ‘sleep at night’ option

Finally, and for a slightly different second opinion, Alan Breen, investment manager at Quilter Cheviot Europe, put forward some thoughts – namely that the whole £350,000 from your property sale should go in low risk bonds.

He said: “Assuming your strategic objective for this £350,000 is to provide higher-than-cash returns with a lower-risk profile, we would recommend buying fixed income (bonds) where the aim is to provide returns at or above inflation, while diversifying your exposure across currencies, governments, semi-states and high-quality corporates.”

A reasonable aim for your £350,000 portfolio would be to generate 2%-3% in interest income annually, said Breen.

While this isn’t going to move the dial in any great manner, “this portfolio should also act as ballast in your balance sheet to counteract the volatility inherent in higher risk assets that you are exposed to in your other investments”, Breen said.

“It should, in other words, provide you with some ‘sleep at night’ comfort when compared to more risk-on investments in your other portfolios.”