Income Investing Strategy: Understanding Basics and Types? Every investor in this world is different and unique in its style. But the notion that an investor uses a particular trading strategy or investment style is total bullshit. Instead, everyone uses a different combination of methods and techniques, suitable as per their needs and requirements. For instance, the trader who wants some risk in his portfolio along with a safe, regular income, then he would probably allocate some part to growth investing and some to income investing.
Now, what are these? Here is the full article on growth investing. You’ll get whatever you want! And, Income Investing Strategy is something we’ll cover in this post. In this blog, we would understand the necessary details of income investing tips. After that, we’ll know the different types of income investing one can do!
What is Income Investing?
Income Investing is an investment technique for users who want a regular income from their holdings. The income can be in the form of dividends, interest payments, and bond yields. You set your investment portfolio in a way that it gets you some regular source of money, either quarterly, half-yearly or annually.
The ‘Perfect’ income investing portfolio depends upon the expectations of the spender in terms of risks, return, and objectives. One can consider it as a passive income source and understand that here the emphasis is not on wealth creation. Real estate and bonds are one of the safest and best investments in this regard. Remember, these investments pay you a portion of their profits to you, depending on the part you own.
Moreover, the general perception is that this strategy is mostly used by old, retired, and pensioner people, who wants to have a fixed income source without selling their assets. However, it is not the case; this strategy works equally well for all ages and is customization as per individual needs. For instance, the stocks and bonds which pay out dividends are generally the most stable, high-quality investments.
Let us try to understand it with the help of a great example!
Let’s say you choose to invest your 5000 Euros in two parts, i.e. shares and bonds. You spend 3000 Euros in ABC Ltd. shares, and the remaining 2000 Euros in QPR Inc. issued ‘bonds’. While ABC is a dividend-paying share, QPR is a half-yearly paying bond. Now, apart from the stock price rise in ABC, you are also getting an annual payment of 400 Euros.
And, QPR is also issuing the sum of 100 Euros half-yearly. Thus, apart from the investment, making your regular income increase by 600 Euros annually!
Investors measure their portfolio by annual earnings and the growth of the market value of the spending. For instance, Nestle, a high dividend yield stock in Europe, has helped investors maximize their health as well as annual earnings.
But, how many types of income investments are in the market? Don’t worry! Below is the list.
Types of Income Investment Strategy
1. Dividend Stocks
One of the apparent income investments is dividend stocks. Stocks are partial ownership in a company, and the dividend is the annual payment to the shareholders from the profit. Some organizations pay out a fixed percentage back to their stakeholders, while some not. The shareholder then has the option to take it out or spend it again on more shares.
Increment in dividend and stock prices, both are the signs of a healthy working firm. Both of them are interconnected and change over time, either upward or downward. Investors spend for capital and income growth simultaneously.
Also, the rise of both stock price and the dividend yield is rare but possible, when the economy is doing well. However, generally, a high dividend yield could affect the share rate negatively.
Bonds is precisely the opposite of shares. Shares let you buy the ownership, while the ‘bond’ is lending money to an organization for a fixed time. In other words, when one invests in a bond, he’s giving a loan to firms, for a particular time, and in return, he will get some interest. You lend an amount; you’ll get some yearly ‘interest payment’ for it, and at maturity, get your amount back. Sounds easy but it is not! As compared to shares, the bonds carry a bit high risk. How? ‘Bonds’ are also issued at a price, just like shares, and the chances of bond price going down are more as compared to stocks. Their prices can change anytime!
Moreover, the higher the interest, the higher will be the risk. There are two kinds of bonds, namely, government bonds and corporate bonds.
Government bonds are merely lending your money to a government firm and carry less risk and returns.
Similarly, a corporate bond is when you lend your money to private organizations. These carry high risk but high return too. Thus, it is fundamental to do your analysis well here.
3. Real Estate
Property income investment still stands as one of the favourites among spenders. There are a plethora of reasons behind it. One, it is the safest long term investment as people are rising in the world, but the land is limited. Second, it is an excellent source of regular income. One can generate regular monthly payments as rent without worrying about the price up or down. And third, the rental property is yours, and the prices are skyrocketing.
Therefore, sell whenever you want. It would also diversify your portfolio significantly from financial instruments. You would also get tax benefits (which you will not get in other ways). What else could you ask for more than this? And, these were only notable advantages, other small benefits are still in disguise.
One can also start by taking a property on loan with a 20-25% down payment and keep it on rent. The monthly instalment will be carried out by rents (along with you living there too), and if it came as a wise choice, then the returns are unmatchable!!!
ETFs and Index & Mutual Funds
ETFs, index funds, and mutual funds are the same and the other thing, just the fundamentals are superficially different. The objective and work of all of them are the same.
Index funds are the mutual funds of a particular market. For instance, the NIFTY is the index fund of the top fifty companies in India. Similarly, mutual funds and ETF are aggregates of stocks, bonds, or other financial securities.
The ideology behind them is rather than investing in a single instrument or asset; one can invest in them too. These offer a diversified portfolio and perform as an aggregate of all the assets mutually. In simple words, it is the average performance of all the financial instruments’ work.
Many mutual funds that emphasize income investing and diversification also mitigates the risk.
4. Certificate of Deposit
CD or certificate of deposit is an agreement to lend loan to a bank for a fixed period in exchange for interest payment. The risk associated is negligible here, but the returns also follow it. The profits are meagre! Also, indeed the interest is paid yearly here, but one can change it to other time frames.
5. Peer Lending
Crowdfunding or Peer-to-Peer lending, a.k.a. P2P is also an attractive income investment. It involves lending money to individuals and other small firms. The rate of return varies from individual to individual and ranges from 5-15% per annum. Website platforms like Lending Club and Prosper promote it and help individuals with a great idea but no fund to start their business.
The advantage is you can start with tiny investments and earn interest over it. Remember, it is lending and different from growth investing. One can use interest for reinvestment or can take it out too.
6. Other Types
Apart from the above mentioned, there are several different ways for income investing. Savings account, money market account, annuities, treasuries, etc. are some of them. While each of them has its specifications and pros & cons, it depends upon the investor, what he wants and why that only!!!
So, these were the types of income investing. One can choose among any of them and start earning their passive income now. Remember to read every point carefully and get into the details of the one you want. Incomplete information would cost you more than anything.
The Bottom Line
Income investing Strategy does nothing but generates passive income from different sources. Passive income is something that requires a one-time investment, and then it creates frequent earnings without the need for patrolling the investments, from time to time. Moreover, in a full-time investor’s life, passive income is crucial and helps them pay their bills. Thus, it is critical to have a proper report of the return and make changes accordingly.
Also, indeed the passive income doesn’t need adjusting the portfolio, but it is vital to get your eyes on it once in a while, especially to stocks and bonds. These two change prices and are influenced by market situations too.
Lastly, make sure you carefully read the advantages and disadvantages of Income investing, along with the above points. It would immensely help you understand your decision!