Understanding where income comes from:
A practical guide for Canadian investors

Whether you're planning for retirement, looking to supplement your earnings or simply want your money to work harder, knowing the different ways income is generated can help you make more informed investment decisions and achieve your immediate and long-term financial goals.

Basic traditional building blocks of investment income

Let’s start with the fundamental components of a diversified income stream. Two important building blocks of income include:

1. Fixed income (bonds)
2. Dividend-paying stocks

Within each asset class, investors have a wide range of options to achieve a steady cash flow.

1. Fixed income essentials: Bonds 101

Bonds (also known as “fixed income”) are a cornerstone of most income portfolios. When you buy a bond, you’re essentially lending money to a government or corporation in exchange for regular interest payments (called coupons) and the return of your principal (the original amount you invested) at maturity.

Bonds quick reference guide—key questions and concepts

Who are the bond issuers? They include federal, provincial or municipal governments, as well as corporations—essentially the ones that need to borrow money.

Why are bonds issued? Companies or governments issue bonds to borrow money from investors to pay for things now—like building roads or expanding a business—and promise to pay it back later with interest.

What is a coupon? The interest payment a bondholder or investor receives on a regular basis—typically every six months or once a year—for lending money to a bond issuer. Think of it like the rent borrowers pay investors for using their money.

What is bond maturity? The specific date the bond issuer must repay the full amount of the original investment (principal or face value) to the investor—assuming the issuer doesn't default (fails to pay interest or repay the principal). Maturity dates can range from a few months to 30 years or more, depending on the bond.

What is credit quality? Measures how trustworthy a bond issuer is when it comes to repaying the principal on time. Agencies like Moody’s, S&P and Fitch do the work of evaluating bonds and assigning grades based on financial health and stability. Investment managers may also make their proprietary assessments of a bond’s rating. There are two main categories of credit quality.

• Investment-grade bonds are “the reliable overachievers”—lower risk, steady income. These include AAA, AA, A, BBB ratings (S&P/Fitch) or Aaa, Aa, A, Baa (Moody’s). The higher the grade, the stronger the issuer. Think governments and big, stable companies.
• High-yield or “junk” bonds are “the risk-takers” offering higher returns with more risk. These include BB, B, CCC, CC, C, D ratings (S&P/Fitch) or Ba, B, Caa, Ca, C (Moody’s). These bonds might come from newer companies or those facing financial headwinds, but they can deliver attractive interest if you're comfortable with the risk.

What are the risk/reward profiles of common bond types?

• Safe and steady—government bonds: Most secure and stable with lower risk but lower returns
• Balanced middle ground—provincial bonds: Mix of stability and better returns but considered fairly safe
• Corporate bonds—more risk-reward: Higher interest payments but more risk as businesses are considered more volatile than governments

What is duration and interest rate risk? Duration measures a bond’s price sensitivity to interest rate changes.

• Longer-duration bonds (with longer maturities) are more sensitive and can shift more dramatically to rate changes
• Short-duration bonds (with shorter maturities) tend to remain more price-steady as rates go up or down

Understanding a bond’s lifecycle: An example from purchase to maturity

Example bond details

• Purchase amount (face value): $1,000
• Coupon rate: 5% annually
• Coupon payment: $50 per year (5% of $1,000)
• Maturity: 5 years

Balancing the bond elements: Why professional management matters

While bonds may seem straightforward, building a reliable income stream takes more than picking a few and letting them ride. Factors like credit quality, interest rate movements and bond duration affect how much—and how consistently—you earn. That’s where professional management comes in. They can continually evaluate the creditworthiness of bond issuers to reduce any risks of default, steer clear of lower-rated bonds or diversify holdings to minimize the impact of the poor performance of one or a few bonds on the overall portfolio.

Another critical point about bonds is that when interest rates rise, existing bonds with lower coupons become less attractive, so their prices tend to fall. When rates fall, those same bonds seem more appealing (they pay more than new ones), so their prices tend to rise. This inverse relationship can play out across the bond universe in many ways. However, it’s important to remember that when investing in the context of a mutual fund, investors are never locked into a single bond until maturity. Professional managers can adapt portfolios in real time to manage interest rate risk while pursuing steady income and potential growth.

The inverse relationship between bond prices and interest rates:
How bond managers keep portfolios balanced as rates move

Professional bond managers may:

• Shorten duration: Use bonds that mature sooner to reduce price drops.
• Add floating-rate bonds: These adjust with interest rates, helping protect income.
• Reinvest at higher yields: As older bonds mature, buy new ones paying more interest.  

Professional bond managers may:

• Extend duration: Hold longer-term bonds that gain value when rates fall.
• Lock in higher yields: Secure better-paying bonds before rates drop further.
• Look for price gains: Take advantage of rising bond prices for potential capital growth.  

Dividend due diligence—the value of professional oversight

While dividends can be a steady source of income, some factors can determine how often and how steadily you get paid. To enjoy consistent, reliable payouts, it’s essential to invest in financially strong, well-managed companies with a reliable track record. That’s where professional management adds real value: Experienced investors know how to spot sustainable dividend payers and steer clear of risky “yield traps” that may look appealing but can disappoint.

Beyond the basics: Other complementary income tools

While building blocks like bonds and dividend-paying stocks are central to any income portfolio, there’s a wide universe of income-generating assets that can both improve diversification and return potential. Here are some other types of income investments that can complement core income investments:

Preferred shares are hybrid investments offering the best of both steady bond income and the growth potential of stocks. They typically pay higher dividends than common shares on a regular, predictable schedule. Think of them as a reliable middle ground for those who want income stability with a little upside. In the event of a company’s liquidation, preferred shareholders are also paid out before common shareholders, adding a valuable layer of security.

REITs (Real Estate Investment Trusts) let you tap into the income potential of real estate without having to own or invest in the buildings directly. REITs pool money to own and manage income-generating commercial or residential properties. In return, they pay investors a steady stream of rent-based income, often monthly.

Floating rate bonds have a built-in advantage of adjusting automatically with current market rates. When interest rates rise, so does your income—helping you stay in step with the economy. They’re especially valuable in uncertain or rising-rate environments, offering a flexible and responsive source of income.

Capital gains and Return of Capital: Other ways investors get paid

Along with income in the traditional sense, a typical income-focused portfolio can also include other types of distributions that still put money in your pocket, just in different ways.

Capital gains: When an investment is sold for more than the original purchase price, it earns a profit called a capital gain. While never guaranteed or regularly occurring, these gains are typically distributed annually to investors at the end of the year and can boost overall return.

Return of Capital (ROC): When you receive an ROC, you’re not earning income, you’re getting a portion of your original investment back from companies. Companies do this to maintain payouts, manage taxes or return excess capital, among other reasons. As a result, your cost base (essentially what you paid for an investment) gets reduced by the amount of ROC you receive.

Diversification and aligning with your goals

Every income investor is unique. A retiree seeking steady payouts will need a different approach than someone focused on long-term growth with some income on the side. That’s why it’s essential to build a portfolio that balances risk, time horizon and income needs.

Professional managers can help diversify your investments—across dividends, bonds, real estate and more—while making sure everything aligns with your personal goals. It’s about earning income in a way that feels stable, sustainable and right for your needs and outcomes.

 Diversifying not just assets—but managers

True diversification goes beyond what you invest in—it’s also about who’s managing your money. Each investment manager brings their own perspective, strategy and strengths to the table. By combining multiple managers and approaches in one portfolio, you tap into a broader range of insights, reduce reliance on any single investment style and create more opportunities to enhance income and manage risk more effectively.

 Getting the right outcome from your income

Understanding where your investment income comes from is the first step toward building a more confident financial future. Whether it’s interest income from bonds, dividend income from stocks or other income sources, each component plays a role in delivering steady, reliable income.

Want to learn more about how to generate regular income potential in your portfolio? Explore the new ATB Monthly Income Portfolio—designed to provide consistent cash flow through a diversified, professionally managed approach.