Investing for income is an appealing concept for investors of all kinds. If you’re focused on increasing your nest egg’s size, then a reliable stream of cash is appealing because it removes some of the guesswork. And if you’re at or near retirement, income-generating investments are a great way to have your portfolio pay you a little at a time instead of generating a big chunk of cash by selling off assets forever. Regardless of your age, strategy or portfolio value, income investing is an important area that should be at least a small part of how you allocate your money. Here are seven ways that have something to offer.
One of the most common ways to invest for income is via the bond market. However, bonds are also one of the most varied and complicated asset classes. There are government bonds that involve loans to local municipalities, the U.S. federal government or even foreign governments. There are also corporate bonds that involve loans to enterprises of all shapes and sizes. And finally, the yield generated by a given bond varies based on the specifics, including the borrower’s risk profile and the maturity of the bond. Properly researching individual bonds can be quite a task. As a result, most individual investors instead opt for bond funds.
Dividend stocks are generally riskier than bonds, since companies pay them out of their profits. As the financial crisis of 2008 demonstrated, even the most stable companies can have a crisis that dries up profits. Consider Citigroup (ticker: C), which slashed payouts from 54 cents a quarter in 2007 to a measly penny per share after the financial crisis. Still many are willing to take on this extra risk if it means they can enjoy the potential of a regular payday with the long-term hopes of seeing their initial investment grow alongside the rest of the stock market. Dividend stocks can be a win-win when they deliver capital appreciation and consistent income.
Preferred stock is a kind of hybrid between stocks and bonds. It is less stable than bonds, since the stock value can fluctuate thanks to market forces. Preferred shares take a back seat to bondholders in the event of bankruptcy, but offer more stability than common shares. And income investors will be particularly interested in the fact that these assets tend to provide a significantly higher yield. As the name implies, preferred stock isn’t just handed out to anyone. But several ETFs, such as the iShares Preferred and Income Securities ETF (PFF), allow you to invest in this asset class with only a modest amount of cash.
Another popular investment class for income investors is real estate. That includes buying a property in your hometown and renting it for income, as well as the arms-length strategy of investing in publicly traded real estate stocks. There’s a special class of stock known as the real estate investment trust that grants favorable tax treatment to a corporation if it distributes nearly all of its net income to shareholders. This creates a leg up for firms that need a ton of capital to purchase and manage properties, but also for investors seeking income. Investors can buy individual REITs or put money in an ETF for ease and diversification.
There are several nontraditional sources that can help supplement your income potential if you’re willing to put in the time and energy to seek them out. Some living near shale oil fields may find they can earn a regular paycheck by selling mineral rights to the energy under their land. Others may participate in peer-to-peer lending, where you act as a banker to loan cash to someone starting a business or expanding their house. Those with means could consider a silent partnership in a local business. These nontraditional sources all require diligence, since they are not typical investments. But they can be a useful source of diversification and, in certain cases, bigger income potential.
Another income opportunity is the tried-and-true method of parking your cash at your bank or credit union to generate surefire monthly interest payments. With a guarantee by the Federal Deposit Insurance Corp. up to $250,000, these are perhaps the most certain income investments on the planet. The tradeoff for that safety comes in the lower yield. A one-year certificate of deposit account offers about 2% in potential income at current rates, which would amount to $5,000 annually on that FDIC-insured maximum of $250,000. Unless you have other sources of income or wealth, a CD alone likely won’t grow your nest egg or provide the cash you need in retirement.