Income Investing: A Strategy to Earn More Cash In 2024

Idle, uninvested cash in a bank account will earn little to no interest and start to lose purchasing power compared to inflation. Income investing is a strategy that involves parking cash in interest-earning investments to earn passive income. These investments are generally short-term and highly liquid investments, such as U.S. Treasury bills or money market funds.

Summary:

• Idle cash in a checking or bank savings account costs your money.
• Cash should always be put to work in income-generating investments.
• Income investing focuses on generating a steady income and aims to grow and preserve your capital.
• There are multiple styles of income investing, ranging from lower to higher risk. Income investing is a strategy that is highly adaptable to any investor’s personal finance situation.

Who Needs Income Investing?

Income investing is a strategy for those unwilling to sacrifice spending today for tomorrow. Instead of focusing on returns from capital appreciation, income investing focuses on generating consistent income from investments.

Generating income from investments is a strategy that works at any stage of an investor’s life, whether you’re a younger investor looking for a side hustle, or a retiree who wants their investment portfolio to generate sustainable income.

Bonds provide stability and regular interest payments, while dividend stocks offer higher yields and growth potential. According to certain studies, shares that pay dividends have significantly outperformed non-dividend paying stocks over long time horizons. Real estate, specifically through real estate investment trusts (REITs), allows you to benefit from rental income without the hassle of owning properties directly.

What Is Income Investing?

Income investing involves constructing an investment portfolio that includes investments specifically designed to generate a consistent flow of income. The objective is to earn ongoing cash flow, instead of relying on appreciation in your investments.

Income investors typically utilize assets such as dividend-paying stocks, bonds, real estate, money market funds, and CDs to generate income. The composition of your portfolio will depend on your income goals, time horizon, and risk tolerance. By diversifying your investments and carefully balancing different types of income-generating assets, you can minimize risk and ensure a stable income stream.

Types of Income Investing

Let’s take a closer look at the different options available for income investing.

One option is dividend stocks, which can provide you with a steady stream of income and the growth potential. When selecting dividend stocks, look for companies with a track record of consistently increasing their dividends over time. Stocks that have consistently grown their dividends tend to outperform the broader market.

Another option is bonds, which offer stability and regular interest payments. Bonds provide diversification benefits and stability to an income portfolio. Include a mix of government and corporate bonds to balance risk and return. Consider Treasury Inflation-Protected Securities (TIPS) as an inflation hedge.

If you’re interested in real estate, you can consider investing in real estate investment trusts (REITs) that allow you to benefit from rental income without the hassles of property management.

Money market accounts, mutual funds, and exchange-traded funds (ETFs) are also worth considering as they can provide income opportunities. These cash investments can be found in any major brokerage.

These options allow you to choose the income investing strategy that aligns with your financial goals and risk tolerance.

Dividend Stocks

Investors can benefit from dividend stocks, which are shares of companies that distribute a portion of their profits as dividends. With dividend stocks, you receive regular income from the company’s earnings.

High-quality dividend-paying companies often increase their dividends over time, providing you with growth potential. Additionally, dividend stocks have historically been less volatile than non-dividend-paying stocks, making them a good option for reducing risk in your portfolio.

Don’t underestimate the power of compounding through dividend reinvestment as well. Reinvesting dividends can significantly boost total returns over long periods. Many companies offer dividend reinvestment plans (DRIPs) to automate this.

DRIPs, which are also known as dividend reinvestment programs, give shareholders the option of reinvesting the amount of a declared dividend into additional shares, which are bought directly from the company.

Investopedia

To find the best dividend stocks, you can explore lists of top dividend ETFs or mutual funds. By including dividend stocks in your investment strategy, you generate income and potentially grow your wealth over time.

Bonds

Investors can diversify their income portfolios by including various types of bonds. Bonds offer regular interest payments and are generally less volatile than stocks, making them an appealing choice for income investors.

There are different types of bonds to consider, each with its own unique characteristics and level of risk.

U.S. Treasuries are the safest bonds available and currently offer attractive rates. Treasury inflation-protected securities (TIPS) are designed to protect the purchasing power of investors. A popular strategy is to build a T-Bill ladder, which involves investing in multiple T-Bills with different maturities, creating predictable and reliable payments. It’s essential to include a range of income sources in your portfolio that align with your goals, timelines, and risk tolerance.

Corporate bonds, on the other hand, generally offer higher yields but come with increased risk. Banks often issue debt in the form of CDs, which pay more than even the rates they offer in their high-yield savings accounts.

Municipal bonds provide tax advantages for investors in higher tax brackets.

Lastly, high-yield bonds, also known as junk bonds, offer the potential for higher returns but are considered the riskiest type of fixed income.

By diversifying their bond holdings, investors can increase their income potential while effectively managing risk.

Money Market Accounts

If you want to diversify your income portfolio, consider adding money market accounts. These accounts are safe and easily accessible funds for earning modest returns on your idle cash. Money market accounts function similarly to checking accounts, but they typically offer monthly interest, unlike most checking accounts.

 Money market mutual funds are investment funds that place money into a diverse range of money market tools such as cash, short-term government bonds, commercial paper, and other similar securities. Money market fund returns will fluctuate based on the variations in short-term interest rates. Currently, money market funds, like Treasury bills and other fixed-income securities, offer yields above 4% or even 5%. 

Real Estate

Including real estate in your income investing strategy can offer additional sources of income and the potential for capital appreciation.

One popular way to access rental income without owning property directly is through real estate investment trusts (REITs). These companies own and manage income-producing properties like apartments, office buildings, and strip malls, and distribute most of their income to investors as dividends.

Another option is Real Estate Limited Partnerships (RELPs), where you join forces with other investors to develop or purchase real estate. Here is a table summarizing the various types of real estate income investments:

Including real estate in your income investing strategy can help diversify your portfolio and potentially increase your income.

Actively Managed Mutual Funds and ETFs

Actively managed mutual funds and ETFs in your income investing strategy to diversify your portfolio and generate consistent cash flow. These types of investments offer professional management and diversification by holding multiple securities.

Here are two reasons why you should consider including mutual funds and ETFs in your income investing strategy:

1. Professional Management: Mutual funds and ETFs are managed by experts who specialize in selecting income-generating securities. This can help you optimize your portfolio and maximize your returns.
2. Diversification: Mutual funds and ETFs hold a mix of securities, including stocks, bonds, and REITs. This diversification spreads your risk across various asset classes and sectors, reducing the impact of any single investment on your overall portfolio.

Both mutual funds and exchange-traded funds (ETFs) represent pooled investments. These funds invest in securities such as stocks, bonds, REITs, alternative investments, and more.

While some of these funds are managed proactively by professionals, others are index funds that benchmark the securities they hold with a specific index – a prime example being the numerous mutual funds and ETFs paralleling the S&P 500 index. 

Being they are made of many securities, mutual funds, and ETFs present a diversified investment option under professional management.

There are multiple types of mutual funds and ETFs that help you generate income.

Some funds exclusively hold dividend-paying stocks. One type of dividend income stock fund holds stocks with a long history of consistently paying dividends. Another type might exclusively look for the dividend stocks with the highest yield.

There are also mutual funds and ETFs that provide income through bonds. These could range from bond funds focused on Treasuries, corporate bonds, muni bonds, or a combination of them all. One popular cash ETF is the ultra short-term Treasury ETF, which holds floating rate notes that pay the latest 13-week Treasury bill rate. The risk of bond funds lies in the impact of rising interest rates. Because the bonds within a fund don’t mature, the value of those bonds will decline when interest rates go up.  

How to Build an Income Investing Portfolio

To start building your income investing portfolio, it’s essential to diversify your investments and adjust the mix over time. One effective way to do this is using funds like ETFs and mutual funds. These funds provide access to various securities, which helps reduce transaction costs while ensuring diversification. Remember to focus on overall returns rather than short-term market movements as long as the income stream remains steady.

Another effective strategy includes a mix of bonds, dividend stocks, real estate investment trusts (REITs), and cash equivalents. Diversify across sectors, geographies, and asset classes to minimize risk. Allocating to international bonds, for instance, can provide diversification.

Consider the following table as a guide for a diversified income investing portfolio:

Remember that these percentages should be adjusted based on your individual circumstances and preferences.

• Bonds: Government and corporate bonds offer a stable income stream and add stability to your portfolio. Treasury inflation-protected securities (TIPS) can also help safeguard your purchasing power.
• Dividend stocks: Invest in high-quality companies that distribute a portion of their profits as dividends. Dividend stocks tend to have lower volatility and can help mitigate risk in your portfolio.
• Real estate: Consider investing in REITs to access rental income without owning physical properties. REITs own and manage income-generating properties and distribute income through dividends.

By diversifying your income investments across these asset classes, you can generate a reliable income stream while minimizing risk.