Income investing is the practice of designing a portfolio of diversified investments to achieve a passive income to live on. These investments can include real estate, stocks, mutual funds, and bonds.
Here are the tips to successful income investing for beginners.
1. The Definition of Income Investing
The art of good income investing is putting together a collection of assets such as stocks, bonds, mutual funds, and real estate that will generate the highest possible annual income at the lowest possible risk.
2. How the Social Unrest of the 20th Century Gave Birth to Income Investing
Despite some nostalgia for the 19th and early 20th centuries, society was quite messy. For instance, in that time-frame, if you were Jewish or Irish, most companies wouldn’t hire you.
If you were gay or lesbian, you were prescribed electroshock therapy; black men and women dealt with the constant threat of mob lynching and rape.
3. The Widow’s Portfolio Bursts Onto the Scene
These investments would generate enough monthly income for her to pay the bills, keep the house, and raise the children without a breadwinner in the home. Her goal, in other words, was not to get rich but to do everything possible to maintain a certain level of income that must be kept safe.
Today, with pension systems going the way of the dinosaur, and wildly fluctuating 401(k) balances plaguing most of the nation’s working class, there has been a resurgence of interest in income investing.
4. How Much I Should Except from an Income Investing Portfolio
The rule of thumb in income investing is if you never want to run out of money, you should take no more than 4% of your balance out each year for income.
For instance, if you manage to save $350,000 by retirement at age 65 (which would only take $146 per month from the time you were 25 years old and earning 7% per year), you should be able to make annual withdrawals of $14,000 without ever running out of money. That works out to a self-made pension fund of roughly $1,166 per month pre-tax.
5. Types of Investments I Should Hold in an Income Portfolio
When you build your income investing portfolio you are going to have three major “buckets” of potential investments. There are dividend-paying stocks, bonds, and real estate.
Dividend-paying stocks combine both common stocks and preferred stocks. Both of them are useful. Companies that pay dividends pay a portion of annual profit to shareholders based on the number of shares they own. A dividend yield of 4% to 6% has generally been considered good for some time.
When it comes to bonds, you have many choices. You can own government bonds, agency bonds, municipal bonds, savings bonds, or others. Whether or not you buy corporate or municipal bonds depends on your personal taxable equivalent yield.
Lastly, real estate has its own tax rules, and some people are more comfortable because real estate offers some protection against high inflation.
Many income investment portfolios have a heavy real estate component because its tangible nature creates lasting value. Psychologically, this provides a needed peace of mind to stick to a financial plan during fluctuating markets.
