Income investing is the process of purchasing assets, such as stocks and bonds, that provide regular cash payouts. Some stocks pay a dividend, often monthly or quarterly. This is usually a fixed amount but can change over time. The yearly dividend amount divided by the purchase price of the stock is called the dividend yield.
For example, if a stock pays $1 in dividends per year, and a share can be purchased for $20, the investment is producing a 5% yearly return. Over time, the price of the stock changes, but if the dividend doesn’t change, the investor’s yield stays the same. If the dividend increases to $2 per share, the yield becomes 10% on the $20 purchase price, even if the stock is trading at $45. This is because the investor purchased at $20, and they still get the $2 yearly dividend. A person buying the stock at $45, and receiving the $2 dividend, is getting a 4.4% yearly income return.
In comparison, bonds pay a set amount of interest at regular intervals. This can also act as income for the bondholder. When the bond matures or expires, the face value of the bond is paid back to the bond buyer. The yield on bonds works in a similar way to dividend stocks. The yearly interest divided by the purchase price of the bond lets the investor know their yearly per cent return.
Income could also come from real estates, such as buying a property and renting it out. Alternatively, it could come from a REIT that pays out profits regularly.