Pros and Cons of Income Investing: Income investing is an appealing style for many spenders. Earlier, it was famous among the pensioners, but now young people are also showing some interest. And why should they don’t get attracted? The features sound so perfect. It goes like – You’ll need to invest a certain amount in a firm, and they’ll give you some income in exchange from time to time. And, then at maturity, you would get your principal back!
Sounds ideal, but it is not that easy!
If you’re also someone who is thinking of switching to income investing, then this blog should be your foremost priority. In this post, we’ll cover both the sides of investing in income assets, i.e. advantages and disadvantages. At last, read the conclusive post and decide what is right for you!
Spoiler Alert: There are more disadvantages than advantages.
Benefits of Income Investing
1. Hedge Against Bears
Income investments usually have very little or no effect on a bear market. During the depression when most stock prices shall go down, dividend from stocks can act as a hedge. Do you get now why it is the favourite of pensioners and retirees? The market will cover itself when the depression would be over, but the regular income doesn’t stop.
However, sometimes many organizations also cut their dividends by some percentage to compensate for stock fall. But, it is better than investing in growth stocks which fall in depressions.
2. Income investing firms are fundamentally strong
Organizations which pay you a cut from their revenues are one hundred per cent financially healthy as compared to the firm which doesn’t pay, of the same level. Remember, it is an ideal, not mandatory scenario. Firms which pay a yield, mostly have positive, stable performance data. Many companies declare a dividend to attract investors while the firm who doesn’t is also not always performing poorly.
3. Less Volatility
Income stocks are generally considered as defensive stocks. The defensive (not defence) stocks are shares of the company which supplies essential goods and services. Thus, it would not be affected much by the economic condition. Food & utility shares is an excellent example of it. It also makes them the least volatile because no matter what happens, people will eat, drink, and live anyways.
Limitations of Income Investing
1. Affected by Interest Rates
Income investments are not much affected by market downfalls, but it is indeed affected by interest rates. When any country’s interest rates rise, income investment loses value and vice versa. There are two fundamental reasons behind it.
- First, the high interest rate will constraint them to reduce profit sharing and pay the extra amount.
- Second, if an economy increases rates, then more people will switch their spending from income investments (which yield low returns) to government organizations.
2. Low Long term Returns
If we try to be honest, then know that income investment is for extra annual earnings and not returns. One of the failures of income investments is their share price growth rate is meagre. It is because the organization is using their revenues to pay its stakeholders instead of using it again to grow business.
Moreover, it is also possible that you invest 1000 Euros today and get 50 Euros per annum, i.e. a 5% return. But, at maturity, the value of your spending is only 500 Euros. Looks like a bad deal?
Another significant disadvantage of investing in income holdings is that many of them are taxable. Although not every income method falls under it, primary ways like dividend yield, bond profits, real estate rent are taxable. Thus, do proper research for your style of investing.
For instance, dividend yields are 100% taxable regardless of your annual income.
4. Not Frequent
Most people do not realize this thing until they spend the money. All the earnings from income investments are not paid monthly or quarterly. Instead, you have to wait for your payment, which comes once in a year or half-yearly. It surely would make you suffer for your bills, rents, and other fees. Thus, the lack of control on timings can make this strategy unattractive to many.
So, these were the pros and cons of Income Investing. Remember, it is crucial to understand both the sides of the coin and then make a wise decision. And if you have decided to invest, then here is how to do it!!!
The Summary – Pros and Cons of Income Investing
We tried to cover significant points on these points. Now, it is up to you! Your decision should be based on valid reasons and not influenced by any emotional factor. Undoubtedly, the income investment, apart from creating your wealth, gets you some income too. But, when it is about earning your priority should always be an above-average company and then dividends and interests.
Moreover, the annual returns in many of the income assets are merely close to 2-3%. And, do you know what the average UK inflation rate is? It is 2.5 – 3%!!!
However, it is only a general scenario. If you spend some more time on selecting the right instrument, then it can do wonders too!!!