Investing for Income Strategy Explained Plus 10 Pros & Cons
This is a complete guide to understanding an income investing strategy.
Furthermore, the article will outline what you need to know about investing for income. And, how it compares to other investment strategies.
Then you can decide. Whether this approach is right for your situation.
Why? Because every investor should have an investment strategy.
To achieve financial goals. And maximize investment returns. With the least amount of risk.
I’ve been using an investing for income strategy for nearly 20 years. And today, I want to share my thoughts and experiences with you. So, let’s dive in…
What Is Income Investing?
My income investing definition has 3 parts.
First of all, investing for income is 1 of several types of investment strategies.
Simply put, an investment strategy is a defined approach to investing. It guides the choices an investor makes for his or her investment portfolio.
Furthermore, the primary objective of an income investing strategy is to generate a constant stream of income.
Finally, that income is paid to the investment owner in the form of interest, dividends, or rents.
Disclosure: At no cost to you, I may get commissions for purchases made through links in this post.
How Income Investing Strategy Works
An income investing strategy involves buying income-producing assets. And accumulating them in an income investing portfolio.
The goal is to generate the highest possible cash flow. That is consistent with the investor’s tolerance for risk.
Why Choose An Income Investing Strategy?
People like you and I choose an income investing strategy for 1 main reason. The regular monthly passive income stream it provides.
First of all, income investing for retirement is a popular application of this approach. For example, the income can be used to supplement other forms of traditional retirement income. For those in their 50s, 60s, and beyond.
Furthermore, some people apply the strategy as part of building multiple income streams. To support a lifestyle of financial independence early retirement. Also known as FIRE.
Finally, an investing for income strategy can be used for diversification. To augment and supplement other investment strategies. In a well-rounded financial portfolio.
For example, some investors use the best investments for income. In combination with assets purchased with the objective of growth. To benefit from the best of both strategies.
So, we have answered some important background questions. What is an income investing strategy? How does it work? And, why some people choose this approach. Versus other investment strategy options.
5 Key Topics About Income Investing Strategy
Next, it is time to cover these 5 subjects:
- Types of income investments
- Key terms an income investor must know
- Other types of investment strategies
- Advantages of income investing
- Disadvantages of income investing
When we are done, you will have the information necessary to decide if income investing is right for you.
Types Of Income Investments
There are only 3 types of investment income. But, there are many different investments that generate income. Let’s start with a very broad list.
- Certificates of deposit
- US savings bonds
- High yield savings accounts
- Money market accounts
- Peer-to-Peer (P2P) loans
- Preferred stocks
- Dividend stocks
- Real Estate Investment Trusts (REITs)
- Master Limited Partnerships (MLPs)
- Exchange-Traded Funds (ETFs)
- Rental properties
- Real estate crowdfunding
- Ownership in private businesses
Are you interested in learning more about these income investments? Then you will want to check out my comprehensive guide to income-producing assets.
Each investment on the list of income assets shown above is explained in greater detail. So, I won’t repeat that information here.
Best Investments For Income
Instead of explaining each income asset. Let me offer my opinion on the best investments for income.
Because that is a large list of income-generating investments. And it may be overwhelming when pursuing income investing as a beginner.
In my opinion, the best and most popular investments for income are:
- High Yield Savings Accounts
- Dividend Stocks
- Real Estate Investment Trusts (REITs)
- Exchange-Traded Funds
My suggestion is to keep it simple when getting started. Stay away from unusual or exotic investments.
Just focus on 3 or 4 of the above-listed asset classifications. Once you get more comfortable, you can branch out from here.
You can learn more in this article about how to build an income portfolio.
The article breaks down how to choose the best income-producing investments. And, how to combine them in a portfolio. Using income investing strategies.
Next up, some important terminology anyone interested in income investing strategy should know.
Key Terms Income Investors Must Know
Here are some key terms you should understand. To make the most of your income investments.
This term applies mainly to savings products and bond investments. For example high-yield savings accounts, money market accounts, certificates of deposit, and corporate bonds.
It is the rate you earn. In return for letting someone else have your money.
For example, put $500 in a bank savings account with a 1% interest rate. Then, the bank will pay you $5 per year in interest ($500 times 1%).
Next, we have the definition of dividend yield.
This term applies mainly to stocks, REITs, MLPs, and exchange-traded fund portfolios. It is the annual dividend rate divided by the asset’s price per share.
Let’s use XYZ investment as an example. I will assume that XYZ consistently follows a quarterly dividend payment pattern.
Furthermore, until they announce otherwise, XYZ will pay a 25 cents per share dividend every 3 months into the future.
The annual dividend rate is $1 per share. Calculated as 4 quarterly dividends per year multiplied by 25 cents.
And let’s say XYZ stock is trading at $20 per share. So, we have a dividend yield of $1 annual dividend per share divided by $20.
Or, a 5% dividend yield. That’s how dividend yield works.
If you are interested in dividend stocks. And, I think every income investor should be. Then you should review this guide on exactly how dividends work.
The term rent applies to real estate investments. Whether you let someone borrow a room in your home. Have a rental property. Or, own land.
In exchange for use of the real estate. You set, charge, and receive rent.
I’m not much of a real estate investor. I always say one single-family home is enough real estate for me.
But other people make a very good income investing in real estate. If this area interests you, check out my article about getting your start with real estate investments.
Portfolio income is the interest, dividends, or rents from the combination of income investments that you possess.
While each investment has an interest rate, dividend yield, or rent. Your portfolio income is the total from all of them.
It is the steady stream of cash you receive each year. In other words, the total income from all of your investments.
The money received is yours to do with as you wish. No matter what happens to the value of your income investments. It can never be taken back.
Portfolio income is what income investing strategy is all about. So, you won’t want to miss the post on what is portfolio income, and why it’s important.
Now, take the total of the annual income being received. And divide it by the value of all your income-producing assets. This is the calculation for portfolio yield.
For example, let’s say your income portfolio generates $5,000 in annual investment income. And at some point in time, the market value of your income assets is $100,000.
Then, your portfolio yield is 5% ($5,000 divided by $100,000).
Investment Costs & Fees
Finally, it costs money to invest. Fortunately, these costs have fallen dramatically in recent years.
Both through zero-commission stock trading. And low-cost ETFs. So, keep your investment costs low. It’s one of the best investment tips I have.
These are good things. Because investment expenses come right out of your investment income. Lowering the amount of cash that hits your pocket.
Do you need a good no-cost brokerage account? To buy and sell dividend-paying stocks. I use and suggest Webull in this product review article.
The Webull app is fast and easy to use. Also, it has excellent stock research capabilities to find the right dividend stocks for your income investing portfolio.
And, for a limited time, Webull is offering free stock for new accounts. You can learn more about opening a Webull account here.
Next up, let’s talk about some other popular investing strategies. Because an income generation strategy is not the only approach you can take.
Once we understand other investment strategies. Then, we can go through the pros and cons of investing for income strategy. For example, income vs. growth investing.
Other Types of Investment Strategies
First of all, there are many different types of investment strategies. Too many to go through in this article focused on income investing.
So, I will just touch on a few of the most popular strategies for investing. Furthermore, what is the common element among these approaches? It is to buy lower and sell higher!
Finally, each of these strategies can also produce income. But, it is not the primary objective.
The focus of value investing is to identify and buy investments that are cheaper than they should be. Invest. And wait patiently for the markets to correct and properly value the asset.
First of all, growth investing unlike income investing focuses on capital appreciation.
Furthermore, these growth investors look for investments that show signs of rapid growth. Either through revenues, profits, or capabilities that will possess great value in the future.
Investments are made even if the price appears excessive.
This approach looks to make the most of a positive market trend. It means investing in assets showing upward-trending prices.
The strategy assumes that once an upward trend is established. It will persist for some time.
Socially Responsible Investing
This investment process involves building an environmentally and socially friendly portfolio of assets.
It takes a broader view. And looks at how investing can have a positive impact on our world. While trying to achieve competitive returns on investment.
This approach involves identifying and investing in troubled assets. Fixing them up. And flip them for profit.
Distressed investing is applied across a variety of asset classes. Such as real estate, debt, stocks, and private businesses.
So, there you have 5 other investment strategies that you can pursue. Regardless of what strategy you choose. You need a tool to pull it all together.
I use and like Personal Capital. It allows me to track my spending and investments all in one online place. There is no need to access multiple accounts. And remember multiple login credentials.
You can check out and learn more about Personal Capital here. Best of all, it’s free to sign up and use. Remember, keep those investment management costs low!
Now, with these other investment strategies in mind, let’s talk about the advantages and disadvantages of an income investing strategy.
Advantages of Income Investing Strategy
Realize, I’m a little biased. Because I prefer investing for income versus the other investment strategies we just discussed.
But, I will do my best to be balanced and objective. Then, you can decide.
First up, several advantages of an income investing strategy.
An income investing strategy generates passive income. Once you get your income investing portfolio set up, make money while you sleep.
Because the cash will just keep rolling in. With very little effort on your part.
Furthermore, as the title of this article suggests. Get started on an income investing strategy, and you can start making money now.
Invest for income and use the right techniques. Then your passive income will grow over time.
First of all, there are several advanced income investing strategies. That you can use to maximize your portfolio income.
Furthermore, dividend growth stocks provide this benefit on their own. Because they increase their dividend rates annually. That means more cash in your pocket each year.
Are you interested in learning more about these methods? Then, you will want to review this article on the best ways to increase income from a portfolio of assets.
The article is full of good income investing ideas. I refer to them as advanced. But, they are not difficult to understand. And put in your investment process.
Then you can choose the best income investment strategies. That works for you.
Retirement Income Investing Strategy
An income investing strategy is excellent for supplementing other forms of retirement income. Or, having regular earnings to pursue early retirement.
Multiple Streams Of Income
Whether you are retired or not. There are benefits to having multiple streams of income.
Look to combine income from a job, side hustle, and investments. This approach is an excellent wealth-building strategy.
And provides peace of mind. Knowing that if one income stream dries up. You have others to fall back on.
Finally, do you need a side hustle? I take consumer surveys for extra cash. It’s fun to have your opinion heard.
Income Investing Strategy Is Tax Efficient Versus Active Income
Some types of investment income receive preferential tax treatment. In contrast, earnings from a job are often taxed at the highest rates.
These rates include income taxes AND employment taxes. There are no employment taxes on investment income.
Income Continues Through Difficult Times
Investments and asset prices do not always go up. If you haven’t lived through a long bear market, let me tell you it isn’t any fun.
But your income from investments will continue to be paid. Yes, it may decrease temporarily. Or, not grow as rapidly.
But it is comforting to have regular investment income payments. During difficult economic and troublesome times.
Next, some disadvantages of an income investing strategy. Then, we will wrap up.
Disadvantages of An Income Investing Strategy
Just like any decision in life. There are always pros and cons to the choices we make.
So, to present a balanced argument for your consideration. Here are several drawbacks to investing for income generation strategy.
Monthly Income Varies
It is very difficult to create a productive income portfolio that generates the same income every month.
So, be prepared for some months to generate more income. And other months, much less.
There are methods to smooth out the cash flow. But, it will never be perfect. Like a steady paycheck from a salaried job.
So, if you need to invest for monthly income. And that monthly income must be the same each month. An income investing strategy might not be right for you.
Low-Interest Rates & Dividend Yields
We have been living through a historic period. Of ultra-low interest rates. And low dividend yields from the safest income-producing stocks.
Low rates and yields make it more challenging to build a substantial amount of investment income. Meaning it takes more time. Or, more investment funds. Or, both. To build the investment income your desire.
Income Investing Is Tax Inefficient Vs. Other Investing Strategies
Taxes on investment income receive preferential treatment versus earned income. But other investment strategies can be even more tax efficient.
Because investment income is taxed when received. While other investing approaches may defer taxes until the investment is sold.
You can minimize this disadvantage. By putting your income investments in an IRA account.
Have you been thinking about opening an IRA? To get your retirement income investment strategy in order.
Then, consider M1 Finance. They have excellent online tools to get your IRA opened quickly and efficiently. You can learn more about M1 Finance here.
Income Investing Returns Lag At Times
When the economy is booming. And stock investments are on a rapid rise. Income investments will typically trail these other investments and investment strategies.
This can be frustrating. When all you hear is about the money everyone else seems to be making off their investments. The fear of missing out (FOMO) can get to you.
Income Investing Can Be Boring
Income investing requires patience. And, a long-term approach.
When others are touting their stock market gains. And day trading just for the fun of it. An income investing strategy may seem more appropriate for your grandmother.
Income Investing Strategy: Wrap Up
As I have said, I am a big proponent of investing for income. And the financial benefits it provides.
It’s not an exotic investment style. I just like to keep it simple. And practice patience.
But, it is not for everyone. Hopefully, I have put together all of the facts. So you can decide for yourself. Whether pursuing income investing strategies are right for your situation.
Have you decided? Are ready to get started building your passive income from investments? Then, I suggest you read this guide that outlines a 5 step plan to put an income strategy into action.
More Reading About Investing Topics
- Investing content library full of useful investing articles
- The best physical assets to buy and hold
- Tips for building a portfolio of blue-chip stocks for dividends
My Favorite Investing & Finance Resources
Throughout the article, I mentioned several tools and resources I use in my pursuit of investment income. So, I have summarized them here for your convenience.
|Webull: Trade stocks for zero-commission on this powerful app|
|M1 Finance: Put your investments in an M1 Finance IRA account|
|Survey Junkie: Make extra cash taking consumer surveys|
|Personal Capital: Manage your total financial picture for free|
Disclosure & Disclaimer
This article, or any of the articles referenced here, is not intended to be investment advice specific to your situation. I am not a licensed investment adviser, and I am not providing you with individual investment advice. The only purpose of this site is information & entertainment. We are not liable for any losses suffered by any party because of information published on this blog. See this site’s Disclaimer and Privacy tab for more information.