You’ve probably heard this phrase: “Put your money to work for you.” The idea is that your money can earn money, through the power of interest. When you invest your money, there is a chance that it will work on your behalf. Your principal is put to work by others, and the returns are shared with you.
This is the idea behind income investing. When you are involved with income investing, you make investments that are designed to provide you with regular cash flow. The goal of income investing is to invest capital in such a way that your regular returns can fund your every day expenses.
An Income Portfolio Takes Time to Build
Income investing sounds like a nice idea, but it’s important to understand that the desired results don’t come overnight — or even next year. Unless you have a large amount of capital already (from an inheritance, winning the lottery, or an accumulated nest egg), it takes time to build up an income portfolio. It can take seven to 10 years, or longer, to build up a portfolio that provides reasonably regular returns.
Here are some of the more common investments found in an income portfolio:
Bonds are basically loans you make to an organization. You supply the principal, and the organization pays interest during the term of the loan. When the term is over, the principal is returned to you. You can then use the money to invest in another bond. It is possible to invest in bond funds, though, so that you aren’t always trying to replace your bonds.
However, it is possible that the bond will be defaulted on. In such cases, you can lose your principal; all you have to show is the interest earned so far. Another issue is that the yield on less risky bonds might not be high enough to beat inflation, so your earning power might be reduced, even though you are receiving regular interest payments.
When you buy dividend stocks, you receive a regular payout. Dividend paying companies pay a portion of their profits to stock holders. You can build up your shares in a dividend paying company, and watch your payouts grow. On top of that, you have the possibility of capital appreciation if the stock price rises over time.
However, dividend paying companies can cut — or eliminate — their payouts any time. If the stock price tanks, you could lose out on your principal, as well as your source of income (if the drop results in a dividend cut).
It is also worth noting that you can invest in REITs for dividend payments, if you want to add a little real estate to your portfolio.
P2P lending is becoming increasingly popular in the US, but is having a hard time catching on in Canada since the are separate provincial securities regulators. Whether you are providing microloans to startups in other countries, or helping someone pay off debt, you have the opportunity for regular interest paments. However, you could end up in a default situation, where your principal is lost.
Income investing can be a way to create regular income for you by putting your money to work. However, as with all investing, there are risks involved. And it takes time to build up a portfolio that is likely to meet your spending needs.