Investing for Income
- By:
- Catherine Brock | October 22, 2007
Investing for income is a popular retirement planning strategy. It can also be equally valuable to any investor who'd like to minimize portfolio volatility.
"Ladies and gentlemen, we'd like to reveal the name of our winner, the recipient of our Set for Life Bonus Prize of $10,000 per month for the next 40 years! And that lucky winner is…" Only a rare few are lucky enough to win sizeable streams of passive income. But that's alright, because you can still appoint yourself runner-up with a solid income investing program that will provide returns for years to come.
In the world of investing, there are two primary disciplines: investing for growth or investing for income. When you buy a stock for $20 per share, for example, hoping that the price will rise, you're investing for growth. When you buy a stock for $20 so that you can collect regular cash dividend payments, you're investing for income.
Corporate shares, income mutual funds, corporate bonds, government bonds, and certificates of deposit (CDs), are all income investment vehicles. The types of instrument that you choose will dictate how and when you receive your income payments.
Some stocks maintain the practice of paying regular dividends to shareholders. These dividends can be cash payments or additional share allocations. They can be paid out on whatever schedule the company chooses, but twice-annual dividend payments are common. The company pays them at its discretion. Some routinely pay dividends, while others only do it sporadically.
Fixed-income funds are mutual funds that invest in bonds, CDs and other income-paying securities. Typically, these funds make quarterly cash payments to investors in the form of a check or direct deposit. Income fund investing has the advantage of diversification; the disadvantage is that your returns are diluted slightly by the fund's administrative costs.
When you buy a bond, you're lending money to the bond issuer. The bond issuer then makes regular cash interest payments to you until the bond matures, or until you sell your bond to someone else. Bond payments are usually made twice annually. Treasury bonds issued by the U.S. government are very popular with income investors.
CDs are time deposits that pay a fixed interest rate for a specified time period. The interest payments are typically deposited into the account monthly. When the CD matures, you can withdraw the money or roll all or some of it into a new CD. Risk-adverse investors tend to like CDs because they're FDIC insured up to $100,000 per depositor. CD rates are also higher than those offered on cash savings accounts, and there are no transaction fees associated with a purchase.
You can hope for that big lottery win-we all do-but don't count on it. A better strategy is to use the money you have to make more.
"Ladies and gentlemen, we'd like to reveal the name of our winner, the recipient of our Set for Life Bonus Prize of $10,000 per month for the next 40 years! And that lucky winner is…" Only a rare few are lucky enough to win sizeable streams of passive income. But that's alright, because you can still appoint yourself runner-up with a solid income investing program that will provide returns for years to come.
In the world of investing, there are two primary disciplines: investing for growth or investing for income. When you buy a stock for $20 per share, for example, hoping that the price will rise, you're investing for growth. When you buy a stock for $20 so that you can collect regular cash dividend payments, you're investing for income.
Corporate shares, income mutual funds, corporate bonds, government bonds, and certificates of deposit (CDs), are all income investment vehicles. The types of instrument that you choose will dictate how and when you receive your income payments.
The company line
Some stocks maintain the practice of paying regular dividends to shareholders. These dividends can be cash payments or additional share allocations. They can be paid out on whatever schedule the company chooses, but twice-annual dividend payments are common. The company pays them at its discretion. Some routinely pay dividends, while others only do it sporadically.
Mixing it up
Fixed-income funds are mutual funds that invest in bonds, CDs and other income-paying securities. Typically, these funds make quarterly cash payments to investors in the form of a check or direct deposit. Income fund investing has the advantage of diversification; the disadvantage is that your returns are diluted slightly by the fund's administrative costs.
Playing the banker
When you buy a bond, you're lending money to the bond issuer. The bond issuer then makes regular cash interest payments to you until the bond matures, or until you sell your bond to someone else. Bond payments are usually made twice annually. Treasury bonds issued by the U.S. government are very popular with income investors.
When time's on your side
CDs are time deposits that pay a fixed interest rate for a specified time period. The interest payments are typically deposited into the account monthly. When the CD matures, you can withdraw the money or roll all or some of it into a new CD. Risk-adverse investors tend to like CDs because they're FDIC insured up to $100,000 per depositor. CD rates are also higher than those offered on cash savings accounts, and there are no transaction fees associated with a purchase.
You can hope for that big lottery win-we all do-but don't count on it. A better strategy is to use the money you have to make more.
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