Generating more than gains from investments: Why income matters
When it comes to investing, most individuals tend to think in terms of buying low and selling high as the way to really accumulate wealth. But there is another way: Make your investments earn their keep.
Investment income isn't as much fun to talk about as big gains. No one ever brags at a cocktail party about owning a company that has raised its dividend for 29 consecutive years. But stocks' dividend checks do add to return over time. And they, along with interest payments on bonds or other fixed income securities, may offer you a reliable source of income in the form of regular payments of interest and dividends. When reinvested, these payments may provide a boost to the growth of a portfolio.
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Why invest for income?
Investing for income can create a reliable stream of returns that may help ease the effects of future market disruptions.
In bear markets, owning income-producing assets typically slows down the decline in portfolio value because income return helps offset price declines.
Who should invest for income?
Consider a retiree with a $600,000 portfolio that generates 4% a year in dividends and interest. That retiree is receiving $24,000 a year before Social Security or any pension benefits he or she might be entitled to. That income may allow the principal, or invested amount, to remain invested where it can continue to appreciate.
But people of any age can benefit from income investments. Older and younger investors alike may benefit from income's stabilizing influence on their portfolios and the boost it can provide to savings through its reinvestment. While investing for income may provide additional cash flow and stability, it also saddles investors with tax considerations on the gains they receive.
What are your investment options?
Bonds and bond funds are typically associated with investing for income, and they are effective in adding a relatively reliable income flow to a portfolio. And there are a number of individual stocks and stock funds that pay dividends at competitive rates compared with corporate bonds and many bond funds. Traditionally, these are stocks in companies — or funds that own companies — that are well capitalized, possess a strong cash flow and have a history of increasing dividends.
What are your income needs?
Income-generating securities span the risk/reward and quality spectrums, and the specific investments you choose should complement your goals, risk tolerance and investment time horizon. Your financial adviser can help you choose the income vehicles most appropriate for your situation and your overall investment portfolio.