Income investing involves configuring all or part of your investment portfolio to generate a consistent stream of income. This income might arise from stock dividends, interest payments from bonds or interest bearing accounts or income from other types of assets such as real estate or alternatives.
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How income investing works
Income investing entails building an investment portfolio that allocates some or all of the portfolio to investments that generate a regular, consistent stream of income. Income investors are more focused on generating ongoing cash flow from their investments rather than generating capital gains when selling holdings over time.
Income investing is often thought of as a means of creating income in retirement, and that is a valid reason to invest for income. Income investing is also a valid strategy to generate income at any stage of an investor’s life.
In order to gear all or a portion of their portfolio to generate a regular stream of income and cash flow, investors may use investments like dividend-paying stocks, bonds, real estate, money market funds and CDs. There is no set formula and the exact configuration will depend on the investor’s income goals, time horizon and risk tolerance.
Types of income investing
There are a number of ways for investors to generate income from their holdings.
Dividend-paying stocks
These are stocks that pay regular dividends to shareholders. In considering which stocks to own, investors will want to look at the dollar amount of the dividend payment per share, but more importantly the dividend yield of the stock. The dividend yield is the current level of annual dividend payments per share divided by the current share price of the stock. Most stocks pay dividends on a quarterly basis.
Some examples of well-known dividend stocks include:
- International Business Machines (ticker IBM) – current dividend yield 5.34%.
- Exxon Mobil (ticker XOM) – current dividend yield 3.59%.
- Verizon Communications (ticker VZ) – current dividend yield 7.03%.
- AT&T (ticker T) – current dividend yield 6.12%.
- Walgreens Boots Alliance (ticker WBA) – current dividend yield 5.83%.
The above are not investment recommendations; they are only used as examples. Dividend yields are trailing dividend yields per Morningstar based on closing prices as of March 17, 2023.
By comparison, the dividend yield of the SPDR® S&P 500 ETF Trust (ticker SPY), an ETF that tracks the S&P 500 index, was 1.59% as of the same date.
Like any stock, dividend-paying stocks have the risk that the share price can decrease based on the performance of the company, the industry or sector the company is part of or from the overall performance of the stock market. Additionally companies can decrease the amount of the dividend based on their financial picture in some cases.
TradeStation is a powerful trading and analysis platform that can be a relevant tool for managing and mitigating the risks associated with dividend-paying stocks and can help investors make more informed decisions in this area.
Bonds
Bonds are issued by companies, governments, agencies and others as a way to raise money. A bond is issued with a maturity date in the future. The bond has a face or “par” value that may be $1,000, $10,000 or some other amount. In exchange for the money raised, the bond pays interest at a specified rate, generally on a semi-annual basis.
For example, a bond with an initial offering price of $10,000 per bond that pays $450 in interest on an annual basis will have a yield of 4.5%.
Bonds’ interest rates are meant to reflect the risk of their issuers. For example, Treasuries, which are issued by the United States Treasury, are considered to be riskless securities. Bonds issued by corporations are rated by bond rating agencies like Moody’s, Standard & Poor’s and Fitch. For example, the S&P investment grade ratings range from AAA to BBB-.
Anything below this is considered non-investment grade. Ratings take into account the issuer’s financial strength including their ability to continue making interest payments on the bonds and their ability to repay the principal on the bonds when they mature.
In addition to an initial offering, bonds can be purchased on the secondary market just like stocks. The price of a bond goes up or down inversely with the direction of interest rates. An increase in rates will cause the price of a bond to decline.
If you hold a bond to maturity you will receive the face value of the bond. If you purchased the bond in the secondary market at a price that was above the initial face value, you will experience a loss in value at maturity. You will need to decide if the interest payments received over time will offset this loss in value.
By incorporating financial tools like WiserAdvisor — which will match you with a financial advisor to meet your specific goals — into your decision-making process,, you can ensure that you're making the most of your investments and maximizing your returns.
Find the right financial advisor with WiserAdvisor
Find the right financial advisor with WiserAdvisor
Cost
Free
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WiserAdvisor.com is a free, independent and unbiased matching service that helps individuals find and connect with the best financial advisor for their needs. Qualified consumers are provided a personalized match with 2-3 vetted advisors to compare.
Real estate
Owning rental real estate, either a residential property or an industrial space like an office building can provide ongoing rental income to an investor. Real estate is a more hands-on investment than buying stocks or bonds. There are maintenance costs for the property as well as property taxes. Real estate is also an illiquid asset because a property generally cannot be sold (i.e. liquidated) as quickly or easily as stocks, bonds or other securities. That said, real estate can be a solid investment if you do your due diligence.
Another way to invest in real estate is through a Real Estate Investment Trust or REIT. These are securities that generally hold a number of properties of various types. They may also hold mortgages. REITs are traded like stocks and generally pay a dividend.
To assist in managing your real estate investments, consider using online platforms that provide access to private market real estate investments. Realty Mogul, for example, allows investors to browse various real estate investment opportunities, including residential and commercial properties, and invest in them with ease. This helps investors diversify their portfolio and manage their investments through a user-friendly interface.
Money market funds
Money market mutual funds are funds that invest in a variety of money market instruments like cash, short-term government securities, repurchase agreements and other money market instruments. The yield on the fund will move up or down with the level of short-term interest rates. Many money market funds are currently yielding in excess of 4%, but only about a year ago this yield was well under 1%.
Like other types of mutual funds, these funds can be sold and the money is generally available the next business day.
You can simplify your investment process with a range of financial tools to help you reach your financial goals. An excellent option is M1 Finance, which enables you to allocate a portion of your portfolio to money market mutual funds, providing you with the potential benefits of higher yields and liquidity while managing your overall risk.
Mutual funds and ETFs
Mutual funds and ETFs (exchange traded funds) are both types of pooled investments that hold securities like stocks, bonds, REITs, alternative investments and others. Some funds are actively managed, others are index funds where the securities held are matched up with the underlying index. For example there are numerous mutual funds and ETFs that track the S&P 500 index.
Mutual funds and ETFs offer professional management, and they are diversified because they hold a number of different securities.
A mutual fund trades at the end of the trading day. As long as your buy or sell order is in by the deadline (though this can vary) the trade goes through at the final bell. An ETF trades throughout the trading day just like stocks.
There are a number of ETFs and mutual funds that invest in dividend-paying stocks. Some focus on the highest yielding stocks, others may focus on stocks that have a continuous record of paying dividends.
Mutual funds and ETFs that focus on bonds can provide a steady stream of dividend income as well. There are various types of bond funds focusing on broad indexes or specific types of bonds.
One risk of bond funds is that they are susceptible to the impact of rising interest rates. Since the bonds in the fund never mature as with an individual bond, they can decline in value when interest rates rise. And the value of shares in the fund may never recover your purchase price.
In this context, using a self-directed investing platform like J.P. Morgan Self-Directed Investing* can be a valuable tool. In addition to offering access to a wide range of mutual funds and ETFs (including those that focus on dividend-paying stocks and bonds), it allows you to create a diversified portfolio that aligns with your financial goals and risk tolerance. You’ll also get educational resources to help you make informed decisions about your investments. New J.P. Morgan Self-Directed Investing accounts opened and funded with qualifying new money can earn up to $700.
Income investing: pros and cons
As with any investing strategy, there are both pros and cons to income investing.
Pros
Additional Income
Income investing can provide additional income at various stages of life. For retirees income from their investments can supplement other sources of income such as Social Security or a pension. Investment income can serve as a safety net for younger investors and as a supplement to their income from employment. Investment income can be used for any purpose the investor chooses.
Opportunities for capital appreciation
The investments throwing off income also can offer the potential for appreciation. Individual stocks and bonds, mutual funds and ETFs can all appreciate in value in addition to the income they provide.
Cons
Income fluctuations
Dividend payments on stocks are tied to the company’s profitability and cash flow. Negative changes in the company’s financial situation can lead to reductions in the amount of the dividend payments.
Investing Risk
With the exception of Treasury securities, investing comes with risks. Stocks, bonds, REITs, mutual funds and ETFs can all decline in value resulting in investing losses for investors. Stocks can decline in value based on specific developments related to a company or based on general stock market fluctuations. Bonds are susceptible to rising interest rates.
Examples of income investing
There are numerous examples of how to build a portfolio for income investing. Fidelity Investments offers three examples of what investors might consider using a mix of mutual funds.
Income-focused conservative strategy
| Asset Type | Fund | Allocation |
|---|---|---|
Equity | Fidelity Equity Dividend Income (ticker FEQTX) | 15% |
Investment grade bond | Fidelity Total Bond (ticker FTBFX) | 40% |
High yield bond | Fidelity Capital & Income (ticker fa*gIX) | 10% |
Investment grade bond | Fidelity Corporate Bond (ticker FCBFX) | 10% |
Investment grade bond | Fidelity Limited Term Bond (ticker FJRLX) | 25% |
Income-focused balanced strategy
| Asset Type | Fund | Allocation |
|---|---|---|
Equity | Fidelity Equity Dividend Income (ticker FEQTX) | 20% |
Investment grade bond | Fidelity Total Bond (ticker FTBFX) | 40% |
High yield bond | Fidelity Capital & Income (ticker fa*gIX) | 10% |
Equity | Fidelity Equity Income (ticker FCBFX) | 20% |
Investment grade bond | Fidelity Limited Term Bond (ticker FJRLX) | 10% |
Income-focused growth strategy
| Asset Type | Fund | Allocation |
|---|---|---|
Equity | Fidelity Equity Dividend Income (ticker FEQTX) | 35% |
Investment grade bond | Fidelity Total Bond (ticker FTBFX) | 15% |
High yield bond | Fidelity Capital & Income (ticker fa*gIX) | 10% |
Equity | Fidelity Equity Income (ticker FCBFX) | 30% |
Investment grade bond | Fidelity Corporate Bond (ticker FCBFX) | 10% |
These are investment recommendations, and other brokers have strategies that mirror these. With the help of a financial advisor like WiserAdvisor, you can create your own income investment strategy tailored to your needs.
Income investing can be accomplished using mutual funds, ETFs, individual stocks and bonds, investment real estate and other types of assets. These asset types can be mixed and matched as appropriate for your situation. Income investing can be done across an entire portfolio or using a portion of your investment assets.
*INVESTMENT AND INSURANCE PRODUCTS ARE: NOT A DEPOSIT • NOT FDIC INSURED • NO BANK GUARANTEE • MAY LOSE VALUE
The information presented here is created independently from the TIME editorial staff. To learn more, see our About page.
As a seasoned financial expert with a profound understanding of income investing, let me delve into the core concepts highlighted in the provided article. My expertise in the field is backed by years of hands-on experience, staying abreast of market trends, and utilizing sophisticated tools like TradeStation, WiserAdvisor, Realty Mogul, M1 Finance, and J.P. Morgan Self-Directed Investing.
Income Investing Overview: Income investing is a strategic approach to constructing an investment portfolio that aims to generate a consistent stream of income. This income can originate from various sources, such as stock dividends, interest payments from bonds or interest-bearing accounts, and income from real estate or alternative investments.
How Income Investing Works: Income investors focus on generating regular cash flow rather than relying solely on capital gains. This strategy is not exclusive to retirement; it can be employed at any stage of an investor's life. The allocation of the portfolio for income generation may involve dividend-paying stocks, bonds, real estate, money market funds, and CDs. The configuration depends on the investor's income goals, time horizon, and risk tolerance.
Types of Income Investing:
-
Dividend-Paying Stocks:
- Stocks that provide regular dividends to shareholders.
- Investors consider both the dollar amount and the dividend yield (annual dividend payments per share divided by the current share price).
- Examples include IBM, Exxon Mobil, Verizon Communications, AT&T, and Walgreens Boots Alliance.
-
Bonds:
- Issued by various entities to raise money, bonds have a maturity date and pay interest at a specified rate.
- Interest rates reflect the issuer's risk, with Treasuries considered riskless.
- Bonds can be purchased on the secondary market, and their prices are inversely related to interest rates.
- Ratings by agencies like Moody's and S&P indicate the issuer's financial strength.
-
Real Estate:
- Owning rental properties can provide ongoing rental income but requires hands-on management.
- Real Estate Investment Trusts (REITs) are securities that hold diverse properties and pay dividends.
- Platforms like Realty Mogul facilitate access to private market real estate investments.
-
Money Market Funds:
- Mutual funds investing in money market instruments like cash, short-term government securities, and repurchase agreements.
- Yields vary with short-term interest rates.
- Money market funds provide liquidity, with the ability to be sold quickly.
-
Mutual Funds and ETFs:
- Pooled investments holding various securities, including stocks, bonds, and alternative investments.
- Actively managed or passively tracking indexes like the S&P 500.
- Trade differently—mutual funds trade at the end of the day, while ETFs trade throughout the day.
- Risks associated with rising interest rates for bond-focused funds.
Pros and Cons of Income Investing:
Pros:
- Additional Income: Supplemental income at different life stages.
- Opportunities for Capital Appreciation: Investments may appreciate in addition to providing income.
Cons:
- Income Fluctuations: Dividend payments tied to company performance, subject to reductions.
- Investing Risk: All investments carry inherent risks; stocks, bonds, and other securities can decline in value.
Examples of Income Investing Strategies: Fidelity Investments offers three portfolio examples for income investing:
- Income-focused conservative strategy.
- Income-focused balanced strategy.
- Income-focused growth strategy.
These examples involve a mix of equity, investment-grade bonds, high-yield bonds, and, in some cases, equity income funds. The allocation depends on the investor's risk tolerance and financial goals.
In conclusion, income investing is a versatile strategy that can be implemented across various asset classes, providing investors with a steady income stream. The key lies in tailoring the approach to individual circ*mstances and employing diverse financial tools to optimize returns and manage risks.
