Investors tend to focus on two main portfolio strategies: growth and income. Whilst the two can be pursued simultaneously, this involves many trade-offs.
In particular, company profits typically either get reinvested (for growth) or distributed – e.g. as dividends. It is difficult to achieve both consistently and effectively.
For the investor focused on income, what are the best practices for building a resilient portfolio that supports your lifestyle?
Below, we share four tips on how to be a prudent income investor in 2025.
#1 Monitor interest rates and inflation
When rises go up, dividend stocks can be affected. Higher rates tend to translate into higher borrowing costs for firms, eating into their profits. With more pressure on earnings, firms might be tempted to cut, suspend or eliminate their dividends.
Interest rates are heavily affected by inflation. When the price level rises, the central bank (i.e. the Bank of England in the UK) faces pressure to “cool down” the economy by raising interest rates. This is because higher rates encourage people to save and curb their spending.
As such, income investors need to keep a watchful eye on both interest rates and inflation. It helps to check macroeconomic conditions regularly and, if necessary, adjust your portfolio if tailwinds and headwinds are changing the calculus.
Investors can bolster their portfolios by scrutinising their holdings – checking for revenue growth, profit margins, and debt levels to ensure each company can sustain and grow its dividends.
Here, consider prioritising firms with consistent free cash flow (FCF) and manageable debt. Conversely, companies with declining earnings and rising debt may need to be avoided.
#2 Optimise for taxes
How much of your investment income are you keeping after tax? With careful planning, it may be possible to boost your real returns by restructuring assets with a financial adviser.
In 2024-25, each investor has a tax-free dividend allowance of £500. Each person gets their own allowance, so if you are married or in a civil partnership, your spouse/partner can also earn £500 in dividends from their shares without paying tax.
ISAs are another good option for tax planning. Each year, an individual can contribute up to £20,000 to their ISAs and earn capital gains, interest and dividends without tax. This is outside of the above dividend allowance.
A third type of tax-efficient investing is venture capital trusts (VCTs). These are companies listed on the London Stock Exchange that invest in unlisted companies on their investors’ behalf. The returns are distributed to shareholders as tax-free dividends.
Other income-generating investments may be treated differently under tax rules. For instance, UK government bonds are taxed as earnings (making them subject to income tax).
Together, these quirks of the UK tax system can be used to an investors’ advantage to build a tax-efficient portfolio. For instance, a married couple might transfer dividend-paying shares to each other to minimise the dividend tax liability of their household (gifts/asset sales between spouses are exempt from capital gains tax).
#3 Watch out for high-yield “traps”
Naturally, income investors want to get as high a return as possible (within their risk tolerance and due diligence). However, be wary of getting lured into perilous corners of the market.
If a stock has an unusually high yield (above 7-8%), investigate why. A high yield may signal financial distress or an impending dividend cut.
Income investing is not about quick gains. It involves building a sustainable portfolio which continues to support your lifestyle even amidst market turmoil. As such, investors need to foster a long-term mindset and resist the temptation to constantly “time the markets”.
Focus on quality companies and steady income rather than short-term price movements.
#4 Regularly review and adjust your portfolio
Markets change, and so do companies. Check your portfolio at least once a year to reassess dividend sustainability and replace underperforming stocks where required.
Investors should be wary of concentrating a portfolio in a single sector, even if it offers high yields. Instead, diversification can offer higher income stability even as markets fluctuate – e.g. across sectors like financials, utilities, tech and consumer staples.
Rebalance sectors if needed. In a given year, certain areas of the economy might perform better than others. This can potentially throw your asset allocation off-course. As such, it helps to run a yearly (or bi-yearly) review to discuss progress with an adviser and rebalance where necessary.
Investors might also consider looking out for businesses with a history of increasing dividends over time (e.g., Dividend Aristocrats or Dividend Kings). These firms have built a reputation for sharing profits with investors. To halt or cut their dividend would be very damaging, making this outcome far less likely.
Invitation
Income investing takes many forms and can be a powerful way to support your lifestyle. Here at Bure Valley Group, our focus is different – i.e. UK startups with high growth potential. However, many of these firms could become dividend payers in the future as they establish themselves.
Want to speak to us about our early-stage opportunities at our exclusive investor network? Get in touch today to explore our startup projects here at Bure Valley Group.
