What is Income Investing?

Is it important for you to build a portfolio that generates cash? Do you have financial concerns and need an additional income stream in order to pay your bills? In this case, you may want to consider using an older investing method called income investing. This strategy may be right for you if you’re trying to achieve financial independence in life.

In case you are wondering about investment income and how valuable this investment is when you retire, keep in mind that most of us simply do not have enough savings to bleed down every month after we stop working.

The right investment strategy for retirement is one that produces income that closely works like a regular paycheck.

Although investment income may not be enough to cover your expenses, it does reduce your savings withdrawals each year. As a result, your savings can go further. 

Furthermore, if you are not nearing retirement, investment income can be a steady source of extra cash that does not depend on market volatility. The importance of income investing cannot be overstated, regardless of your age, portfolio value, or investing strategy.

Income Investing Definition

Regular employment income accounts for most people’s net income each year. However, a prudent investment strategy can turn moderate savings into an effective investment portfolio over time, generating a sizeable annual income for the investor.

The difference between income funds and growth funds is that income funds invest primarily in cash-generating securities, while growth funds invest mainly in growth stocks.

The goal of an income investing strategy is to build a portfolio of investments that will earn a passive income for you. In short, it generates an income on a regular basis. Portfolios should not contain hot new stocks, but rather safe, secure, and proven to be stable investments that can last long-term.

The art of good income investing is accumulating assets that provide a high annual income at the lowest possible risk. A majority of this income is then paid out to investors so they can use it daily and live a comfortable life without worrying about money.

It is essential to identify the assets that will enable you to achieve your passive-income goals—building them while taking into account your investing philosophy, as well as the certain dangers that can affect them.

You can achieve a steady and passive income with real estate, stocks, mutual funds, and bonds. These assets and more provide a steady stream of income in the form of dividends, bond yields, and interest payments. The income from this type of investment can be received as a lump sum or as periodic interest payments.

For obvious reasons, those at or near retirement often prefer income investing. As a retiree, you depend on a steady stream of income to replace the income you once earned while working. The death of pension systems and fluctuating 401(k) balances have prompted a resurgence of interest in income investing today. In 2020, the amount of money moved around in 401(k)s reached its highest level since 2008.

Advantages of Income Investing

It is true that investing in and of itself entails some level of risk, but income investing can have some major upsides. The following are the major benefits of an income investing strategy.

Regular Income

As mentioned earlier, an income investing strategy guarantees you a steady flow of income. When it comes to fixed income investing, companies and governments that issue bonds are legally obligated to pay coupons or bond interests to you.

Bonds must also be repaid their principal amounts at maturity unless they are in default or are in a liquidation situation. Due to this obligation, you will still receive this income even when the market is weak.

You can also earn a regular income from dividend stocks. Shareholders may receive dividends from a company’s annual operating profits. However, you should keep in mind that not every company pays dividends, which means that not all stocks are dividend stocks. It is also not mandatory for companies to declare dividends every year.

Depending on the economy or the performance of their business, they may have to cut or stop their payouts in a particular year.

Generally, dividend-paying firms are known for paying regular dividends. Their industry tends to be more mature and established. The list includes banks, telecommunications, utilities, tobacco, food staples, essential goods, and real estate investment trusts.

Lower Volatility Risk

An income investment can help you protect your portfolio from market gyrations by creating a more defensive and diversified portfolio.  A bear market usually results in stocks losing their capital gains.

It should be noted, however, that income assets like bonds are lowly or negatively correlated with stocks. Consequently, their prices don’t move in sync. In the event that stock prices move in one direction, bond prices may either move very little or even move oppositely. If you balance these two, you will be able to minimize losses during market downturns and manage risks more effectively.

Additionally, in times of stock market decline, investors following an income strategy typically go through less pain because their assets are usually in sectors that are important to the economy, such as real estate and utilities.

Risks of Income Investing

There is no perfect investing strategy. Even though income investing seems like a good investment, it does have some drawbacks. Risks associated with income investing include the following.

Inflation Risk

It’s important to remember that inflation is one of the main risks, especially with each passing year. Increasing living costs will erode your purchasing power over time even if your income remains steady.

Moreover, inflation decreases your bonds’ real value as well. Despite receiving payments and receiving your principal back at maturity, you still run the risk of losing value on your investment.  The best way to reduce inflation risk is to invest in inflation-linked bond funds or bond funds that have a mandate to invest in bonds.

Interest-Rate Risk

The market downturn may not have much effect on income investments, but interest rates most certainly do. Income investments lose value when interest rates rise in a country and vice versa.

As a result of high-interest rates, dividend stocks are unable to share profits with shareholders. Interest rates and bond prices, however, move inversely. In other words, bond prices fall as interest rates rise. In response to rising interest rates, investors sell off their existing bonds for new ones that will issue higher coupon rates.

Tips for Income Investing Beginners

If you’re considering income investing, remember that building enough wealth to generate a high income consistently takes a long time.  By having a clear and focused investment strategy, you will avoid making rash decisions and stay on track for the long term. 

As a beginner, it’s important to understand the differences between income vs. growth investing. Many new investors come to income investing with the idea that owning a few shares of a company will be enough to make them wealthy.

Realistically, however, it takes several thousand to generate a meaningful income from this strategy. If you’re planning on making an investment or you want to learn more about income investing, our team of professionals can help.

It’s easy to get started, fill out our online form or contact us at 949-881-7128 at Saint Investment Group today!

Frequently Asked Questions:

What is income investing?

Income investing is a strategy in which an individual invests their money in a way that generates regular income, such as dividends from stocks, interest from bonds, or rental income from real estate. The goal of income investing is to provide a steady stream of income that can supplement other sources of income, such as a salary or Social Security. 

How does income investing differ from other types of investing?

Income investment varies from growth investing and speculative investing in that the primary objective is to produce income rather than to increase wealth via capital appreciation. Typically, income investing focuses on investments that provide a constant, predictable income stream, such as bonds, dividend-paying equities, and rental properties. In contrast, some forms of investment may emphasize the purchase of assets that are anticipated to appreciate over time, such as stocks or real estate.

What are the different types of income-generating investments?

Different types of income-generating investments include bonds, dividend-paying stocks, rental property, REITs, and high-yield savings accounts/CDs. Each has its own risks and rewards.