While many people think of investing as saving for the future, you can also create an investment strategy that focuses on building a steady income stream. Basically, you invest in bond yields, interest payments, and dividends to create a monthly income stream. This can be used to replace your current income stream or the augment the one that you are enjoying today.
The key part of an income investing strategy is to create monthly payments to your account using safe, predictable investments. This means that you create a diverse portfolio that consists mostly of low risk investments. Creating a proper portfolio generally means choosing different investments that provide an income while lessening the risk.
Although income investing has fallen out of favor in recent years compared to its glory days, it still is a viable strategy if your goal is to create monthly payments that you can live on. One big advantage is that the money invested remains in your account. You are earning money on the interest generated, so you still have the assets that have been built up over time.
Why Choose Income Investing?
There are good reasons to select this form of investing, especially if your goal is financial independence. While you will have to take some risks if you are younger and want your income to produce dividends early, the benefits of this strategy are considerable.
Benefits of Income Investing
The benefits of income investing include:
Boosts Monthly Income: Even as a supplement, this form of investing provides peace of mind. You can use it to pay your monthly bills, so you can use the money you earn for other opportunities. For those on fixed incomes, it’s a solid hedge against inflation.
Growth: You can put back the money generated by an income investing strategy for long term growth. This means that the longer you invest, the more money you can generate which will make your retirement even more comfortable.
The 4% Rule of Income Investing
When creating an income investment strategy, the goal is that you should be able to live off just 4% of what you have invested. That means for every $100 you have in your investment account, $4 will be generated each year off the expected interest rate. Going higher than 4% means that you are pulling out more money than what is being generated by the interest, so you will run out of money.
Keeping to 4% or less is the goal so that you will have what has been invested for the rest of your life. Plus, the money will carry over to your children or grandchildren with estate taxes taken out, although there may be ways to compensate for this eventuality.
What follows are some tips that will help you create a strong monthly income from investing
Income Investing: Bonds
One of the safest of all investment strategies, you can choose between government, agency, savings, municipal, or other types of bonds. All of them provide advantages depending on the goal of your investing strategy.
Government bonds are low risk and provide a yield in return. You are lending money to the government which in return is providing you with a yield or interest on what you have lent. The best part is that the return is almost predictable to the penny thanks to the steady yield that is typical of government bonds.
One downside is that the yield is usually on the lower end, so you will need to invest in a considerable number of government bonds or diversify your portfolio to reap the rewards. Plus, you will need to choose bonds that mature within 8 years, otherwise you might face the higher risk of fluctuating rates.
Income Investing: Mutual Funds
Sometimes called money market mutual funds, these are investment opportunities that focus on accounts that bear interest such as savings and money market accounts, along with interest payments and dividends. Mutual funds are among the safest of investments and provide a reliable income based on the interest that is generated.
As with bonds, the interest rates are not as high compared to other forms of investing, but it is more reliable which makes them quite attractive when you want a constant flow of cash.
Real Estate Income Investing
One of the most common of income investing strategies, owning property and earning a monthly income from renting it to tenants is a great way to quickly build up a reliable income. This is because real estate has its own tax structure, and many consider it a hedge against inflation. It’s not surprising to see so many people with income investing strategies rely substantially on investing in real estate.
There are three basic methods, purchasing property outright and buying REITs or real estate investment trusts. Buying property and then renting it for residential or commercial endeavors offers a larger payout in return. However, it does come with a large initial cost and you will face fees and payments for upkeep.
A REIT is like purchasing stocks. You are purchasing a piece of a property much like buying part of a company. While the return is considerably lower compared to owning the property outright, it is far less expensive to purchase a REIT, which makes it quite attractive for those with a limited income. Plus, you do not have to worry about fees or maintenance as that is accounted for when you receive your payment. Over time, you can build up as many REITs as you want and reap a consider reward.
Real estate Income Investing with an Investment Fund
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Stocks for Income Investing
Perhaps the most traditional means of investment over the past century, stocks were once never considered for income investing because of the high commissions required for trading purposes. Today, the commissions are quite low which makes them quite attractive in terms of trading for what you need. You can choose between common stocks or preferred stocks with the main advantage being the high interest that can be earned depending on the type of stocks that you select.
Companies that pay dividends to their stockholders should be the target of your stock purchasing strategy. You should select businesses that have a strong reputation for paying solid dividend payout ratios that reach upwards of 50%. This generally means a dividend yield of 5%, give or take a percentage point.
The downside is the risk involved which means that you will have to diversify your portfolio lest your income suffer when a stock goes belly up. The balance between earning a high dividend payment and the fluctuation of stock prices is one that needs to be achieved if you desire to create a steady income.
The Downside of Income Investing
As profitable as this strategy may be, there are a few issues that you need to know before making your decision.
Risk: Even the safest of investments comes with the possibility of risk. Which means that if you diversify your portfolio, chances are there will be investments that do not pay off in the manner expected. The fortunes of companies, real estate, and other endeavors rise and fall with the changing times.
An economic downturn or not investing wisely can quickly strip away the assets you have accumulated. And while not all events are predictable, the last thing you want is to be stuck without the money you have invested in over the years.
It is the uncertainty of risk which also drives up stress which can affect your health. That is why for peace of mind you need to diversity into several different investment strategies. In this manner, if one should succumb to uncertain times, you will have other areas that may remain strong.
For example, real estate is virtually immune to the fluctuations of the stock market. Even during the stock market crash of 1929, those who invested in real estate kept their fortunes while others went bankrupt. However, real estate is not immune to difficulties as the housing crash of 2008 demonstrated. It is why diversification is key to a sound income investing strategy.
Getting Started with Income Investing
If you decide that an income investment strategy is for you, then the first step is set goals and map out a plan to reach them. Even if you are not earning much in the way of an income today, there are steps you can take to build up your investments over time. Stocks, bonds, and REITs offer an excellent way to start as you can purchase them for a low price.
The next step is diversification where you expand your investments across several different areas. This protects your assets, so that if something does occur such as an economic downturn or if real estate should lower in value, you are protected.
Consulting with financial experts is always a plus, but again you can get started with minimal investments in safe ventures such as bonds. Then, you can expand into more risky areas such as stocks to reap larger returns. Again, do all of this with the goal in mind of creating a monthly income based on the interest that is generated. You will find that time and persistence will be your friend as you build up assets that reap the monthly income you want.
Zanthe Alexander Bentley is a finance veteran with over 25 years’ wealth management experience advising both family offices and institutions on their corporate finance requirements including capital raises (debt & equity), restructurings and M&A activities. He has significant experience in investment management and investment banking and spent nine years at UBS focused on convertible bond arbitrage and equity derivatives.
Prior to getting involved in Asset Management he expanded a small Spanish brokerage from a handful of staff in Barcelona to a diversified brokerage company with over 150 personnel spread across 9 countries, transacting deals from High Grade to High Yield Fixed Income and Loans; Structured Products through to exchanged traded equities.
After taking time to focus on family office activities in Asia, Zanthe-Alexander now leads an ambitious zero-leveraged fund providing exceptional growth and income to Sophisticated Investors.
Zanthe Alexander Bentley Twitter: https://twitter.com/BentleyZanthe