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What Is Income Investing?
Income investing is when you invest with the primary goal of making income from your investments. This is contrary to growth investing where the main goal is for an investment to increase in value. This growth is often called capital gains in financial lingo. Income investing is also thought of as slightly less risky than growth investing since most income investments continue to pay income, even if the price of the investment (stock or bond) declines. Most investors think of bonds when it comes to income investing but there are other “slightly” alternative income investments. This is because bonds are used most often to offset stock market risk in investment portfolios in standard asset allocation models used by both individual investors and wealth managers. Because I focus on lower risk investing given my age, I just want to first mention this: Before investing in anything it’s important to have an overall wealth plan that defines your investment goals and acceptable risk to your portfolio based on your age and other factors. Click here to read my related post What Percentage of Cash Should Be in My Portfolio?Bonds as Income Investments

Evaluating Bonds By Yield Comparisons
Comparing the yield (income) difference among the various types of bonds is often done as a way to evaluate bonds, as well as to evaluate overall investment risk from economic problems.
Income Investing Risks with Alternative Assets
There has been a major transition from using only bonds for income investing to other ways to invest for income as more products that were previously only available to high net worth investors and institutions have become available to almost all individual investors.
Factors That Increase the Risks of Income Investing
Here are the 7 factors that increase income investing risks in general. These risks relate mostly to both stock and bond income investing but most also relate to investing in alternative income investments.1. Income Investing Risk from Not Having Enough Savings
It seems to me that the biggest risk today for income investing is not having enough money to produce enough income given low yields from traditional investments in stocks and bonds. It’s scary how much savings you need to generate $5,000 a month in income, for example. To demonstrate the importance of this serious income investing risk, let’s look at some numbers. Click here to read my related post How to Get More Income from Your Investments.How Much You Need in Savings to Make $5,000 a Month
To see how much you need in savings to make $5,000 in monthly income, or any other amount, just multiply the monthly income by 12, and divide the annual amount by the expected yield. For example, $5,000 income a month is $60,000 income annually. You’ll need to invest $2,000,000 to make $5,000 a month in investment income with an expected yield of 3%. Click here to see more examples in my post How Much Do I Need to Invest to Make $10,000 a Month in Income.
Monthly Income Varies
Note that most income investments, such as dividend stocks, pay income quarterly. Income of $5,000 a month is based on an annual average. Click here to read my related post Is Your Retirement Income Goal Impossible?Taxes and Fees
For simplicity, we’ll ignore taxes and fees in this required investment income equation but I can almost promise you they will eat some of your investment income somewhere, somehow. For this reason, it’s important to plan for these expenses in your personal wealth plan. Click here to read my post How Much Money Do You Need to Retire where I address handling extraordinary expenses like taxes.2. Low Yield Is A Risk for Income Investors
We just looked at risk from not having enough savings to generate investment income. The other side of this equation is yield. Low stock and bond yields are a major risk for income investors because they simply don’t generate enough income to live for most investors and retirees. As I write, a yield of 3% used in the example is a reasonable yield for an investment portfolio of stocks and intermediate Treasury bonds with a focus on income generation. It’s easy to see that the investment yield is really important here. And the amount of savings needed to live off investments is huge given the low stock dividends and bond yields. Plus, many investors don’t realize how low investment income is because they confuse long term compounded returns with income as covered more later in this post. Click here to read my related post How Will a Stock Market Crash Affect You?3. Income Investing Risk from Inflation
Inflation decreases the value of your money most years. Historically, inflation is about 3% a year. More recently, inflation has reportedly been 2%. This leaves a 1% real yield when we apply a 2% inflation rate to the common 3% yield in our example. This makes inflation a huge risk for income investors, but only for investors who don’t factor it into their investments and estimated spending in retirement. Inflation is a particularly nasty risk for income investors because you don’t see it. I don’t know about you, but for me, if its out of sight it’s often out of mind. But probably like you, too, I am reminded of inflation every time I go to the grocery store.Ways to Reduce Inflation Risk for Income Investors

4. Risk from Income Investments Period
Income investing in inherently risky because every investment has risks. But then you can’t generate investment income (or grow your wealth) unless you invest. The reality is that when you invest in anything, there is a good probability that the value of that investment will decrease in value, often significantly.
Risk from Income Stocks
Many investors over estimate the safety of income investments. By doing so, they are increasing their risk through unawareness. I silently cringe when I hear statements like “I am invested in conservative income stocks so I don’t have much risk in my portfolio.” Based on history, stocks will drop by roughly 30% to 55% during bear markets once or twice a decade. While income stocks usually drop less, they will still drop significantly if history repeats itself. And while U.S. Treasuries usually counter stock risk, bonds have risk too as covered earlier. The reality is that the asset you’re using to generate income is almost always subject to declining substantially in value. Fortunately, there is reliable and historical data that can guide investors to lessen the risk of income investing. And investors can always choose to not sell at a loss (wait out the declines). In this case, they won’t have a realized loss but this leads to a drop in net worth, at least until their investments likely and eventually rise in value again. Click here to read my related post How to Know If the Stock Market Will Go Up or Down.5. Risk from Misunderstanding Income Investment Returns
As mentioned earlier, many investors confuse generating investment income with capital gains and investment returns. Let me explain so this is clear because it is a huge risk of income investing since it leads investors to over estimate the amount of income they will get. I get comments on my YouTube channel from investors who are downright angry when I explain that income from the S&P 500 index is around 2%. They argue that the annual return from the S&P 500 is 10%. Not understanding the difference between investment income and investment return can lead to huge risk, especially for someone planning to live off investments in retirement. Click here to read my related post How Much Longer Until I can Retire?A. Investment Income

B. Capital Gains
On the other hand, capital gains occur when an investment goes up in value after you buy it. If you buy an investment for $10,000 and it increases to $11,000 you have a capital gain of $1,000. This is called growth, as I referred to earlier in this post. If you actually sell the investment and take the profits, it’s called a realized gain. In this case, the money from this gain goes right into your investment account. (And if you don’t sell the investment, it is an unrealized gain, so you just see the value of your account change. This increases your net worth.) Click here to read my post How Much Money Do You Need to Live Off Investments where I explain this more.C. Investment Returns
Besides investment income and capital gains, the term “investment return” is commonly used when talking about how well an investment has done. Investment returns generally include both the amount an investment increases in value plus dividend payouts plus any compounding.GAINS + DIVIDENDS + COMPOUNDING = INVESTMENT RETURN
A common investment return that you often hear quoted (and often misunderstood) is for the S&P 500 index, for example. Over many decades, this annual return average is around 10%. Click the video to see more about the risks of income investing and this common misconception.6. The Risk of Selling Income Investments at Losses
Income investments often decrease in value instead of increase in value as anticipated. This presents risk for investors who have to sell investments at a loss during bear markets. The way to avoid this risk is to have some investments that move up when others decline in value. Another way to avoid this risk is to have enough cash to pay expenses during market declines, to have hedged liquid investments, or to have enough income generating investments to cover all your living expenses. Click here to read my post entitled What Percentage of Cash Should Be in My Portfolio?7. Lack of Information on Alternative Income Investments
While the focus of this post has been mostly on stocks and bonds, it’s important to note that some of the alternative income investments mentioned above have special risks. More options for income investing is good for investors because most of these investments, such as closed end funds and online funding have higher yields than bonds and even dividend stocks. But there is often less information on some of these alternative income investments which increases risks. Also, some alternative income investments, such as online lending platforms and crowd funding, lack historical data and testing because they are so new. This increase risks from these specific income investing methods. I like alternative income investments but it’s important to research any investment you make. With less information or history available, there is a higher risk with any investment. Click here to read my related post How to Invest in Startups for Individuals.Income Investing Can Lower Risk
Since income investments usually continue to pay income during bear markets, they drop less than growth stocks. Not only this, but income investments can allow many investors to live off investment income rather than taking traditional retirement income withdrawals.Risks of Income Investing Summary
As you read in this post, income investing can increase investment risk but it can also lower investment risk. And the risks of income investing are lower with diversification among many different types of investments. This can include alternative investments such as real estate rentals and small business. With all investing, it’s important to begin with a wealth plan that clarifies how much risk you want to take and choose investments from that clarification to meet your goals.__________________________
The best place to start is with my Ultimate Wealth Plan. You can get it here now. Thanks for reading. If you enjoyed this post, please share it with others on your favorite social media.
The information on this website is for education only and is not to be construed as personal financial advice.