Investing For Income
Cash Flow-Generating Assets For Your Portfolio
There is two basic types of investors: There are the ones who are looking for capital appreciation and those who wants to see their money to produce money now. We call these type investor income oriented. Building an income portfolio involves dividend-paying stocks, high yield bonds, Reit's (real estate trusts), derivates (covered call-strategy options) and other alternative investments designed to generate cash on a recurring basis.
Income investing is a buy-and hold passive strategy, once you buy the asset, there isn't a whole lot more to do. There are multiple types of investment income assets, here's a rundown of the most common.
1. Money market funds
Money market funds (MMFs) are a special type of fixed income mutual funds that invest in short-maturity, low-risk debt securities that pay dividends like most other income-producing investments. Money market funds are low-volatility investments that may be taxable or tax-exempt, depending on the types of securities held. MMFs operate on the net asset value (NAV) standard, meaning they attempt to maintain a share value of $1. Any excess is distributed as dividends.
2. Certificates of deposit
Banks and financial institutions sell income-producing products such as Certificate of deposits which have relatively low risk. Certificates of deposit (CDs) come with terms ranging from six months to five years. The longer the amount of time the higher the interest rate.
3. Real Estate
Real estate provides a solid income that derives from rents paid by tenants of residential, industrial, or commercial properties, and sometimes from mortgage interest on the properties as well. You don't have to become a landlord: REITS and Private placements are common ways to invest indirectly in real estate sector.
4. Dividend stocks
Dividend-paying stocks are issued by companies that make cash payments per share, generally quarterly, based on how well the company is doing.
The two main types of dividend stocks: Common & Preferred.
Common stock dividends are set by the company's board of directors each quarter. the percentage of dividend paid is set until the board of directors decides. Preferred stock dividends are set for regular: pre-determined, fixed payments over a specified period of time.
Although common stock dividends are riskier, you stand to gain more. Preferred stock dividends are less risky, but generally lower potential for appreciation. The most consistent, good dividend-payers tend to be from blue-chip stocks. Dividend Aristocrats are companies with 25 years of consecutive dividend growth may help you weather market storms.
Formula:
How to tell if a dividend is a good one? do not see just at the dollar amount, but at the dividend yield: that is, the company's annual dividend divided by its stock price and multiplied by 100. The dividend ratio indicates a decent payout relative to a company's earnings and market valuation. also looks for companies that are not not borrowing excessively to inflate their dividends distribution.
5. Bonds
Bonds are loans (IOU) to the government or a company. Your income from bonds comes in the form of fixed-interest payments. As the bondholder (lender) you receive a fixed amount of interest income on a regular schedule. When the loan term ends, you receive your original investment back.
The rate of interest on bond depends on the length of term - the longer, the higher - the creditworthiness of the borrower, and market conditions.
Types of bonds:
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Government bonds, also known as Treasuries, are considered extremely reliable because they are backed by the US government, but the tradeoff is a relatively low interest rate.
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Municipal bonds are a form of government bonds issued by states, cities, counties, and other government entities. Interest is exempt from federal taxes and often from state and local taxes as well.
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Corporate bonds are issued by companies (both public and private) and therefore riskier than government bonds. For that reason, they pay a higher interest rate than government bonds. depending on the creditworthiness of the issuer.
Bond prices tend to react inversely to stock prices, making bonds a good tool to balance risk (standard deviation) from equities, as well as an income source.
6. Money market accounts
Money market accounts, also kwon as money market savings accounts, pay higher interest than regular savings accounts, but have more restrictions and often require a higher initial balance to get the best interest rate. You can make withdrawals (including interest) from your money market account few times a month.
7. Annuities
Annuities are contracts sold by insurance companies that make regular payments to you for a set period or for life. You invest an initial sum, then the money is repaid in periodic installments via annuitization. Income payments typically consist of both principal and interest. depending on the type of annuity, you have access to fixed rate annuity or variable whose interest rate fluctuates, depending on the investments asset allocations selected. and lastly, Indexed annuities which provide a return based on an index, such as the S&P 500, Nasdaq, or another index alternative provided by the insurance company.
Remember: The investment risk depends on the underlying stability of the insurance company and the type of annuity selected.