10 Things an Income Investor Must Know Now

Best Tips When Investing For Monthly Income

There are certain things every income investor must know. And that’s the focus of today’s article.

Whether you are just starting your journey as an income investor. Or, are a seasoned pro. There’s a little something for everyone here.

Because who wouldn’t want to make a little more passive income? And investing for income now is one way to go about it.

No delays. Let’s dive in…

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Disclosure: At no cost to you, I may get commissions for purchases made through links in this post.

10 Things An Income Investor Should Know

You can generate regular income from investments. But, being an income investor means knowing:

  • Income investing is an investment strategy
  • There are 3 types of investment income
  • There are many income-generating investments
  • Dividend stocks are a popular choice
  • Getting started income investing is easy
  • How to increase investment income
  • How to calculate investment income
  • Income investing portfolio diversification is key
  • The drawbacks to income investing
  • Income investing is not for everyone

Next, let’s break each one of these items about income investing into more detail…

1. Income Investing Is an Investment Strategy

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An investment strategy is a way to approach investing. Since it’s not a good idea to invest your money without a general way to go about it.

Without an investment strategy. Most investors will chase the latest most popular investment they hear about.

Or, freeze up and not invest at all. Either way is a recipe for low investment returns.

On the other hand, an investment strategy is not a step-by-step investment plan. The strategy merely provides a foundation for one’s investment decisions.

Thus, a strategy helps guide specific investment choices. And, how an investor’s portfolio is constructed.

Then what is the main goal of an income investor? Who pursues an income investing strategy? Well, it is pretty simple.

The purpose of choosing this investment strategy is clear.  Specifically, an income investor’s goal is investing for monthly income.

It is sometimes called passive income. And it is generated from a base of investments that pay 1 of the 3 types of investment income.

Income investing strategies are fairly defensive approaches to investing. Because an income investor seeks to protect their original investments.  From the chance of permanent losses.

And, grow their monthly investment income over time. This leads me to the second thing income investors should know…

2. An Income Investor Can Earn 3 Types Of Investment Income

What are the 3 types of investment income to pursue? Allow me to explain.

Interest Income

First, we have interest income. It can come from several different forms of investment. Some examples of assets that make interest payments include:

  1. Saving accounts
  2. Money market accounts
  3. Certificates of deposit
  4. Loans
  5. Bonds

While the first 3 examples are very low-risk investments. Loans and bonds can range from low investment risk to very high investment risk.

Furthermore, there are many different types of bonds that produce income. Let me list a few for you:

  • Savings bonds
  • Treasury bonds
  • Municipal bonds
  • Corporate bonds
  • High-yield bonds
  • Convertible bonds

Dividend Income

Second, we have dividend income. And like interest income, dividend income can flow from different forms of investments.

Examples of investments producing dividend income include:

  • Common stocks
  • Preferred stocks
  • Mutual funds
  • Exchange-traded funds (ETFs)
  • Real estate investment trust (REITs)

Capital Gains

Third, we have capital gains. Income investors often overlook capital gains as a source of investment income.

Why? Because the investor has to sell one or more of their investment assets. To produce capital gains. And benefit from the income the gains provide.

This practice doesn’t always sit well with income investors. Since most of us prefer not to sell off assets to generate income.

We want to leave our original investments intact. And collect the interest and dividends they provide.

Then selling only in specific situations. When an investment no longer makes sense for the income portfolio of assets held.

3. There Are Many Income-Generating Investment Options

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Hopefully, it’s obvious by now. That an income investor has a lot of income investments from which to choose. To start building an income portfolio.

We have already highlighted most of them. But, don’t forget about real estate.

Although in the strictest sense, the rents earned from real estate. Are not considered a type of investment income.

On the other hand, buy a property. And sell for more than you paid. Then you have created investment income through a capital gain.

Are you interested in making money from real estate investments? Then crowd-funded real estate investing has made it more available to average investors.

Realty Mogul is one such option. They have low investment minimums. And are known for doing excellent due diligence on the real estate projects they pursue.

You can learn more about Realty Mogul here.

So, always keep an open mind. And do your research.

Because some good investment opportunities do not pay investment income. At least not in the strictest form.

As an example. High growth stocks that do not pay dividends.

Or, precious metals. Such as gold.

Because creating capital gains is the only way to generate income from these types of investments.

Okay. We know there are many investment choices. So, where should an income investor begin…

4. Dividend Stocks Are Popular With Income Investors

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Seriously consider dividend growth investing through dividend stocks and ETFs. Because dividend income is one of the most popular types of income streams from investments.

So if you are just getting started as an income investor. Or, you have a fixed-income portfolio made up entirely of fixed-income investments.

And, want to add some growth potential to it. Then consider dividend growth stocks for the dividend yield they provide.

Because dividend growth investing produces dividend income right away.  The potential for higher income from dividend increases in the future. And the opportunity for capital gains as stock prices rise.

Do you need help identifying the best dividends stocks? If yes, I use and recommend the Simply Investing report.

The report delivers top-notch dividend stock recommendations to my inbox every month. Plus insightful analysis about the stock market. And the hundreds of high-quality dividend stocks it covers.

You can learn more about the Simply Investing report here.

5. Anyone Can Become An Income Investor

As long as you have a few bucks, to start with. Anyone can begin income investing following a few steps.

First, you need a brokerage account. Are you focusing on the most popular investment options? Specifically, dividend stocks and exchange-traded funds. Then the Webull app is a great way to go about investing.

The Webull app is fast, free to sign up, and easy to use. Plus all trades are commission-free.

You can learn more about Webull here.

Second, select the income investments that you prefer. You know by now there is a broad range of options.

So do your research. Make your choices. And start investing.

Third, add money to your investment choices regularly. Since consistency is key for income investors.

Choose an amount that you can afford to invest each month. And make it a habit to pay yourself first. By regularly investing that money.

But there’s more. Because once you know how to invest for income as a beginner. There’s more you can learn…

6. Income Investors Know Ways To Increase Income

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Of course, you can increase your investment income by investing more money each month. But there are some other ways to increase the cash flow from income investments.

1. Consider income investments with higher interest rates. Or, dividend yields.

Just realize that the more income an investment pays. The higher potential for risk of loss. It’s the classic risk-reward trade-off.

2. Reinvest all investment income back into the portfolio. Doing so is a must.

Because it compounds your wealth more quickly. As long as you don’t need the income for daily expenses.

3. Reduce income taxes. Keep portfolio turnover low. To minimize capital gains taxes.

Want the best way to reduce taxes? Put your income investments in an IRA. Plus you will have the added benefit of investing for a secure retirement.

For IRA accounts, I like the options from M1 Finance. Also, their accounts provide some advanced income portfolio options. If you would like to take a more hands-off approach.

You can learn more about M1 Finance here.

7. Income Investors Calculate Investment Income

Part of the fun of income investing is watching your portfolio income grow. And dreaming about a time when the income will fully cover one’s living expenses.

So, make that dream real. This means calculating the portfolio’s income.

Fortunately, at the income portfolio level. This task is pretty easy.

To perform a portfolio yield calculation. Follow these 3 steps…

1. Just call up your investment account online.

2. Do a search for dividends and interest the account has paid over the past 12 months. The result is trailing 12-months of income.

3. Then divide that by the total value of the portfolio. And you have the average percentage yield the portfolio is generating.

You can apply the same process to any individual investment. By finding its last 12 months of income payments. And dividing it by the market value of the holding.

It’s interesting to look at individual investments like this. And see how they participate in the overall income of the portfolio.

Based on both the percentage yield. And the absolute level of income. At least if you are an analytical type like me.

It provides ideas on how to optimize a portfolio for maximum income. While keeping an eye on risk.

Speaking of risk…

8. An Income Investor Diversifies Their Portfolio

Income investors become reliant on the income their portfolios provide. That’s the goal. So minimizing risk through income portfolio diversification is very important.

Don’t let the troubles of 1 or 2 income investments. Blow a big hole in your retirement income. That is required for living expenses.

So, diversified income investors spread their investments across asset classifications. Specifically, cash, bonds, stocks, and real estate investments.

And within those asset classifications. Never let 1 holding become too large a piece of the pie.

You won’t make a big hit on every investment you make. So, build your best income portfolio.

Keeping diversification in mind to reduce that risk. With the result of having a defensive portfolio. That will perform well during difficult economic times.

9. Income Investors Face Some Drawbacks

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First of all, I’ve been an income investor for many years.  Furthermore, like what the income investing strategy has to offer.

Thus far, we have discussed many of the advantages. But let’s weigh the income investing pros against the cons.  Therefore, here are a few drawbacks to consider…

Outside of an IRA account. Income investing is tax-inefficient. Because depending on your tax situation income taxes are due when the income is received.

Since this is a defensive approach to investing. It provides less opportunity for very high investment returns. Especially during bull markets.

Rising interest rates can place a drag on existing investments. And inflation can erode the purchasing power of the investment income received.

Finally, when interest rates are low. And stock prices are high. It tough to generate high investment income per dollar invested.

So, let’s close by stating that income investing isn’t the only way…

10. Not Everyone Should Be An Income Investor

There are other investment strategies. And any of them may be more suitable for an investor.

It depends on the investor’s objectives. And risk tolerance.

For example, there is growth investing rather than income investing.

Where the investor chooses between income vs. growth stocks. Since growth investing focuses on capital appreciation.

Investors that pursue this approach look for investments that show signs of rapid growth. Furthermore, growth investments are sometimes made even if the price appears excessive.

On the other hand, by following an income investing strategy. An investor may miss out on some high-performing growth investments.

Growth stocks in the technology area come to mind. Like Facebook, Alphabet, and Amazon.

Whether you choose income investing vs growth investing. Make your choice as easy to manage as possible.

To do so, I pull all of my investment accounts. And expenses together in one place. Using Personal Capital to do so.

Personal Capital makes for easy budgeting, expense management, and investment portfolio analysis. Best of all Personal Capital is free to sign up and use.

You can learn more about Personal Capital here.

Okay now. That concludes today’s 10 things for income investors to know. Let’s wrap up with a summary.

Income Investors: 10 Things You Should Know

The 10 things an income investor should know are:

  • Income investing is an investment strategy
  • There are 3 types of investment income
  • There are many income-generating investments
  • Dividend stocks are a popular choice
  • Getting started income investing is easy
  • How to increase investment income
  • How to calculate investment income
  • Income investing portfolio diversification is key
  • The drawbacks to income investing
  • Income investing is not for everyone

Income investing, growth investing, or another investment strategy. You decide. Because the choice is yours!

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My Favorite Personal Finance Tools For Managing Money

I mentioned several of my favorite finance tools throughout this article. And I have summarized them here for your convenience.

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Author Bio, Disclosure, & Disclaimer: Please join me (Tom) as I try to achieve my goals, find my next place to live, and make the most of my money. However, I am not a licensed investment adviser, financial counselor, real estate agent, or tax professional. Instead, I’m a 50-something-year-old, early retired CPA, finance professional, and business school teacher with 40+ years of DIY dividend investing experience. I’m here only to share my thoughts about essential topics for success. As a result, nothing published on this site should be considered individual investment, financial, tax, or real estate advice. This site’s only purpose is general information & entertainment. Thus, neither I nor Dividends Diversify can be held liable for losses suffered by any party because of the information published on this website. Finally, all written content is the property of Dividends Diversify LLC. Unauthorized publication elsewhere is strictly prohibited.

10 Things An Income Investor Must Know