Earning income can be a difficult task and investing the income is a smart choice. Income investing is a way to make your investments work for you. It is a way in which your income will regularly pay back returns to you. It will consist of securities and assets which will give dividends, interests returns, bonds yields and others. Income investing is a way of creating wealth in the form of passive income in which you will own the assets and get returns over them.
To your investments portfolio, there are many different ways you can add income creating assets. Investment in real estate or creating real estate funds are passive income generating sources. There are returns associated with the investments of stocks or investments in the real estate business.
What is an Income Investing strategy?
Income investing strategy is a way to create a portfolio of assets in which the investors can earn passive income without additional job burden. The primary motive of the investment is to create an extra income source.
The investors invest their income in income generating assets and they will build their portfolio. The goal is generating a high cash flow income. The investor should have the ability to tolerate the risk. Investors’ income will be created from the bond income and Certificate of deposits.
The income investing strategy is an inclusive approach in which the investor has a good quality of portfolio which will be paying returns to the investor.
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How does income investing strategy work?
Income investing strategy works with creating a portfolio. It will vary and include different types of assets. These assets can be investment in stock markets, investments in gold, real estate and others. The investor should diversify their portfolio and invest systematically by taking calculated risk.
Blue Chip Stock Investment
The investment in blue chip stocks is a safe way for passive investment. Blue chip stocks are the big companies which have a very good track record of paying dividends to the investors. The examples of these companies are Walmart, Disney and others. The balance sheets of these companies have a good history of increasing dividends and this has been consistent even during the hard times of the economy.
Income investments in Bonds
Investments in bonds is a safe method of investing as it is a way of creating a fixed income instrument. These are used by the government or the company to increase their borrowings from the investor. Bonds are issued to raise funds for specific projects so if an investor makes their investment into bonds it will create passive income and also it is safe.
The bond issuing entity will promise to pay back the investor the interest amount after a period of time. This investment is best suited for the investor who wants to diversify their portfolio.
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Investment in real estate
Making the right investment in real estate will give you assets and also a return on investment. If you have a piece of land or whether you have a real estate investment trust all can build an asset investment portfolio. There is a high risk and return involved in real estate investment trust as it is associated with the changing market conditions and the government. If you have a piece of land investment it would carry less risk compared to a real estate investment trust.
If an investor makes the right decision of buying real estate land and selling at the right time it can create wealth for the investor. During the great recession crisis, the market of real estate lost as a whole where 70% of rental income was down. Investment in the real estate business and the returns on investments will entirely depend on market conditions.
Master Limited Partnership
It is a different type of investment platform where the investors can invest similar to the stocks. The business owners of the master limited partnerships do not pay any income tax to the state or the federal. The holder of the investment instruments should pay tax on their income portion. The master limited partnerships will pay huge dividends when compared to the other forms of investments because of tax savings. It is a smart investment choice for investors for creating income investments.
Investment in Cash Reserves
Though much is not advised about investing in cash reserves, it is very important to have some portion of your income in cash reserves. It is a form of liquid asset which you have on hand which will help you to meet your short term financial goals.
Having cash reserves in banks in the form of savings accounts and treasury bills is a way of smart investment. The goal of your financial need is also very important to consider. Having cash reserves in account will give you returns and you can quickly get access to your money at any time.
In the event when assets do not pay out any returns, cash reserves can be conservative income source. Investment of surplus cash can be made in money markets, mutual funds, fixed deposits and other income generating accounts.
Pros of Income Investing
- Different passive income ways
- Income investments in bear market
- Low risks investments option
- Reduction in volatile investment portfolio
- Preferential tax treatments vs Income earned
Cons of Income investing
- Inefficiency in taxes
- Low returns
- Sensitive interest rates
- Loss of purchase power
- Lower interest rates
- Uncertainty about future
Take away
Income investing strategy is a good tool for passive investment. It is not advisable to rely completely on an income investment strategy for making a living. The returns on passive investment are subject to market volatility and fixed income is not permanent. The goal of income investing strategy is to generate constant income but it is not guaranteed. The investors are advised to monitor their investments and make a safe move towards income investing.
About the author
Vinay Kumar Goguru is a finance professional with more than 8 years of diverse experience as a researcher, instructor and Industry work experience with both public and private entities. Prior to MyMoneySouq, he spent 6 years in Berkadia, It's a commercial mortgage banking company. He has a "Doctoral Degree in Commerce" and two master's degrees with a specialization in Finance, one as Master of Commerce and other as Master of Business Administration. He has written several articles on personal finance, published by different International journals. He loves traveling, reading and writing is his passion. He has a dream of writing a book on his favorite finance topics.
