One of the ways you can improve your financial stability and freedom is by cultivating income diversity. Income diversity means that, rather than relying on a single source of income, you actually develop different income streams. One way that you can increase your income streams is through income investing.
Income Investing: The Basics
For the most part, income investing is just what it sounds like. You build an investment portfolio that provides you regular income. The returns you get are not received at some future date far in the future. Instead, you receive a regular stream of income from your investments. This money can be used for everyday expenses. The idea behind income investing is to to create a situation in which you are able to get a reasonable income stream at a fairly low risk.
Income investing isn’t about generating a huge return that results in you making it big. Income investing is about get a regular source of money that you can use to pay bills, buy groceries or just put into your emergency fund. When you use income investing as part of a plan for income diversity, the point its to create a source of income that can help sustain you if your main source of income (aka your day job) falls through. If you lose your primary income, your income portfolio can help support you, reducing your need to tap into emergency funds or borrow as much.
Investments for an Income Portfolio
When it comes to the investments you put in your portfolio, it is important to be choosy. The idea is not to generate fantastic returns (although this might happen), but to create a steady income stream. There are two main types of investments that are thought of for income investing:
- Dividend paying stocks: These are stocks that pay regular dividends. You receive a regular payment that represents a portion of the profits earned by the company in which you hold stock.
- Bonds: You can receive regular interest payments when you invest in some bonds. This includes Treasuries, corporate bonds and municipal bonds.
With the rise of person to person lending, more people are beginning to add P2P loans to their income portfolios. If you do use P2P lending as an income investment, it is important to be very careful of which notes you buy, and consider lending only to those with the best credit.
There are risks to any income investing portfolio. Companies may reduce the dividends they pay out. There may be a default on the bonds that you invest in. When choosing investments for an income portfolio, it is important to choose instruments that you are familiar with, and that have a long history of stability.
For someone looking to diversify income, income investing can be helpful. You can begin creating a regular income stream. Income investing works best when you have a large chunk of capital to start with, but if you don’t it is possible to build an income portfolio up over time, with the help of dollar cost averaging. The goal of income investing should be to create a relatively stable source of income — not to try to garner huge returns.
Jon | Free Money Wisdom says
Great points Miranda! One word of caution for dividend stocks though. Do your due diligence and research your stock picks. Some of the worst companies have the highest dividend payouts. Pick quality dividend stocks with a strong track record like Intel and DuPont. I’m looking forward to creating my own side income streams in the future. Right now my focus is maxing out the Roth ad 401k for now!