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Income investing: 10 strategies to generate cash flow

Income investing provides investors with regular cash flow that can either be used for living expenses or reinvested. Learn 10 ways in which some investors are able to generate income from investments, such as dividend stocks, ETFs, bonds, and real estate investment trusts (REITs). See what kind of investors tend to focus on income investing and what the risks are.

What is income investing?

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.

Who is income investing for?

Income investing is for anyone who wants additional income. This may include people who want to invest but also want to get something back from their investments throughout the year. Investors in retirement may also favour the strategy, since their portfolios can provide them with income each month without having to sell their holdings to receive cash.

It is also for anyone who wants to know how to generate income from investments. Some people like dividends because they reduce the risk of holding a stock over time. For example, if a stock pays a 5% dividend on the investor’s purchase price, after 20 years, their initial investment has been returned to them. If the stock drops to zero, then at least the investor got some money out of the stock. However, if a stock doesn’t pay a dividend and drops to zero, then the whole investment is lost.

What are the different types of income investments?

Income investing is anything that produces a stream of income. This includes dividend stocks, bonds, and real estate. These categories can be broken down further into specific investments that have different risk, reward, and diversification profiles.

Equity income/dividend funds

Equity income funds are exchange-traded funds (ETFs)​ that invest in dividend-paying stocks. The fund then pays out dividends as income to shareholders of the fund. Some funds are focused on high yield (higher income), while others are more focused on diversification or the quality of the companies it owns.

International equity income funds

International equity income ETFs are the same as the equity income funds discussed above, except that international funds invest in stocks from outside your country of residence. For example, a UK equity income fund will try to invest in the best dividend stocks in the UK, while a Canadian fund will invest in Canadian dividend stocks.

Global (or region) equity income funds

Global (or region) equity income funds invest in dividend stocks in multiple countries, either globally or within a specified zone, such as Asia, Europe, or North America, for example. These types of funds tend to be well-diversified since they are holding international stocks​, and those stocks may not all move in the same way.

Domestic bond funds

Domestic bond ETFs invest in bonds. The income generated by the bonds is paid out regularly to the investors in the fund. Each bond fund may have a different focus. There are bonds focused on high yield, government bonds, corporate bonds, foreign bonds, or municipal bonds.

International or global bond funds

International or global bond ETFs focus on bonds from certain international regions. Global funds invest in an assortment of bonds from around the globe.

Multi-asset income ETFs

Multi-asset income funds may buy stocks, bonds, and/or REITs. Like other types of funds, the income received is paid out to shareholders of the fund. Owning this type of fund is like owning an equity fund and a bond fund in one investment.

Real estate investment trusts (REITs)

REITs are essentially real-estate companies that trade like shares on the exchange. The income generated by the REIT, from rent, for example, is paid out to shareholders on a monthly or quarterly basis. Each REIT is slightly different, potentially focusing on apartments, commercial real estate, storage facilities, residential houses, or domestic or foreign real estate.

Dividend stocks

Dividend stocks can be purchased within an equity income or multi-asset fund, but they can also be purchased individually. A portfolio with only a few dividend stocks is not diversified. It takes many dividend stocks to diversify a dividend-focused portfolio.

Bonds

Many investors like to have a diversified portfolio of bonds. That way, if one fails, it may not impact the portfolio much. Investors can buy bonds individually or purchase a fund that already holds a wide assortment of bonds.

Value funds

Value funds use a value investing approach. While not all value funds offer attractive income yields, some will. Since these funds attempt to buy stocks that are undervalued, if those stocks pay a dividend, that could also mean attractive dividend yields.

How can I get started investing for income?

  1. Decide on a portfolio allocation. How much of your account do you want to be invested in income-producing assets? You can start out by buying one income-producing asset. Then, over time, you can decide if you want more.
  2. Decide what kind of income-producing assets you want. Essentially, pick one or several categories from the list above.
  3. Monitor your investment portfolio to see how it performs. You can also apply risk-management controls when investing in these types of assets in order to stabilise how much capital is potentially at loss.

FAQs

What are the risks associated with income investing?

A dividend stock may decline in value, resulting in a greater capital gains loss than the gains made from the dividend. Dividends can also be lowered or stopped altogether. Interest on bonds may not be paid, or the issuer of the bonds may not be able to pay the face value of the bond when it matures.

Can I earn monthly income by investing?

Yes, many stocks pay quarterly or monthly dividends. Holding multiple stocks can result in a steady stream of income coming into the investing account. This income can be withdrawn or reinvested into other assets. Bonds also provide regular interest payments, which can also act as income.

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