What is Income Investing?
Nobody wants another “entrepreneur” trying to sell their latest get rich quick scheme. We want investments designed to generate steady income—usually with an eye toward a secure retirement. In the stock market, we call this income investing.
Income Investing
One great “Get Rich Slowly” strategy is income investing.
Income investing involves buying securities that generally pay out returns on a steady schedule. That’s why we consider it “income”. Consider your paycheck deposited into your bank account every two weeks for example.
Bonds are the best known type of fixed income security, but the category also includes stocks, stock and bond funds, Exchange-Traded Funds (ETFs) and Real-Estate Investment Trusts (REITs).
The Internet and real estate bubbles have dominated the financial spotlight in recent decades, fueling the get-rich-quick crowd. But that doesn’t mean that income investing has fallen out of favor. Far from it.
In this course, we’re going to take you on a tour of the most common income-investing options available. But first, let’s talk about why income investing is such an important part of your financial arsenal.
The Importance of Fixed Income
Whether you love your work or not, Father Time will eventually catch up with you. When that happens, you’ll need other sources of income to cover living expenses.
For some, the idea of not being able to spend their money freely is a scary proposition. But living on a fixed income is far from the end of the world. In fact, if you invest wisely, you’ll realize that adding fixed income to the mix is essential.
Mainly, no one wants to live with the fear that retirement is somehow going to lower your standard of living or quality of life. And for many that’s a real threat—especially now that it’s harder and harder to find companies that offer great pension or benefit plans.
That’s where fixed income investments come in: providing you with a reliable income stream with minimal risk.
Fixed income investing is relatively simple, with a select group of easy-to-understand options to choose from. Let’s look at the most common ones.
Bonds and Income Investing
You may know more about Barry Bonds or James Bond than the kind of bonds that are sold in financial markets around the world.
BOND LINGO AND BEYOND
A bond is always issued with a certain face amount, also called the principal or par value of the bond, commonly issued in $1000 increments.
Most bonds pay interest, which varies from bond to bond, and is usually paid out twice a year. For most kinds of bonds, that rate is fixed over the life of the bond, although the terms of some types of bonds aren’t.
The life of the bond is known as its maturity.
In reality, bonds are pretty easy to understand. When you buy a bond or invest in a bond fund, you’re buying debt. You basically become a banker, lending a government agency or company money. In return, you get a guaranteed interest payment, along with all of your original investment.
For example, let’s say a city needs to borrow money to build a dog park. They decide to raise the money by issuing Class A Doggie Bonds for $100 each. In exchange, the city promises to pay you $20 in interest on that bond over a certain period of time. When that time runs out, you get your $100 back as well.
Fixed Income Stocks
You might be asking yourself how something as risky as a stock could be considered part of the “fixed-income” universe. The answer starts with a “D” and ends with an “S”: You guessed it, DIVIDENDS!
Think of dividends as a form of rewarding shareholders for their faith and investment in a company. Usually every three months (or “quarterly”), companies will pay shareholders a percentage of their earnings.