What is Income Investing? – an Explanation

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Income investing is a term that can be used to refer to investments which are intended to generate income in the form of a dividend, capital gains, or other cash. Income investment can vary from buying shares to bonds, or even investing in property. More commonly, it refers to equity income investing, such as taking dividend income and re-investing it to generate more.

Income Investing is Big News

Over the last few years, income investing has become big news. Investors have been reported as pouring huge amounts of money into the sector in 2012 and more recently, as it rebounded from the financial crisis a few years previously. Indeed, in 2013 there had been some speculation that income investing was a bubble, and that too many investors were looking at companies as ‘income plays’, pushing those companies to the top end of their valuation. If it was a bubble, we are several years past that fear and it still hasn’t, at the time of writing, burst. There are many companies with good Price to Earnings ratios and good dividends. The challenge for investors is finding a sector with stability and long term promise.

Income Investment Options

Interest rates have been set at a historic low for a fair while now, and investors are looking to options other than savings accounts in order to ensure that they can protect their future. Dividends are a popular option. Stocks and bonds are the cornerstones of most income investing plans.

Bonds For Income

Bonds deliver a fixed income over a set interval. The idea of using sovereign market debts to get income has traditionally been a popular idea because it is something that is very low risk, however, in some cases they end up paying out less than the rate of inflation so their returns are, in real terms, negative. There are some high-yield bonds, but the risk with these can be higher. It is important that investors have a diverse portfolio so that they are at least somewhat protected in the event of a default.

Stocks & Dividends

Stocks are also an important part of the average income investor’s portfolio. There are many income opportunities in the form of dividends, but those who are seeking dividends will need to take into account how the payouts are decided upon and note that the companies which offer the best dividends are usually the stable companies that are no longer in expansion mode. These may not be the ones with the most rapidly growing shares. They are, however, companies that are respectable and that are in it for the long haul. Instead of reinvesting in the company, these brands are rewarding investors by paying out to them.

Of course, there are expansion opportunities in some cases. Utility companies and real estate investment trusts are two areas where people may have the option of some good returns if they invest. Of course, returns are not guaranteed from any form of investment but since these industries are quite stable they have a lot of potential.

Income investing carries some risk. Fixed payouts are not as appealing in a climate of high inflation. It is hard to measure the impact that monetary policy changes might have when you are looking at a number of investment vehicles of different duration. One useful option is to look at it as ‘for every percentage point increase that you see in market yields, you can expect a fund to lose an amount that is roughly the same as its duration’. This is a rule of thumb. Seek expert advice before you make any more serious decisions about what you are going to invest in.

If you want to learn even more about income investing then check out Investopedia.com they have some good information to further your understanding of this investment strategy.

This is not financial advice and all financial investments carry risks. Investors should seek financial advice from professionals before making any investment.  I wrote this article myself and it expresses my opinions.

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