One of the first questions an investment broker will ask you is about your financial goals. I always had a hard time with that question because mine weren’t that specific. My goal was that I wanted to make money. The difficulty with that answer is there’s more than one way to do that; you can invest for growth, you can invest to preserve wealth and you can invest for income. You can invest in domestic markets, foreign markets, government bonds and a bewildering array of options that fall somewhere in between. Sorting it all can be frustrating if you’re busy and who isn’t these days?
The right investment plan for you depends on your age, income, marital status, risk tolerance and, yes, your financial goals. Every situation is different and your investment plan is going to change over time and with market conditions. When you get to the point where you want to invest for income, here are some tips to get started on your research.
Dividend Stocks and Income Funds
Dividends are usually the first mental stop for people interested in investing for income. Dividend stocks and equity funds that focus on income are ways to concentrate on reaping cash from your investments. The focus on income can be simply that you need the money or because you think market growth will flatten out but corporate profits will remain healthy. The downsides with dividend stocks are the same for equities in general; the potential for a prolonged downturn in corporate profits leading to lower returns.
Preferred Share Funds
Preferred shares are a type of equity security that offers bond-like yields with slightly lower potential for growth. Like convertibles, preferred shares have a “call” provision if interest rates decline, the issuer can call the shares and reissue them at a lower interest rate. If you’re worried about declining interest rates, preferred shares aren’t a great choice. In the current climate, where interest rates have nowhere to go but up, preferred shares can offer superior returns to some types of bonds. Some preferred shares have a fixed time limit before the issuing company can call them back, which offers some protection from lower interest rates.
A Real Estate Investment Trust is a property management instrument that allows companies to avoid certain types of taxes by paying out profits as dividends. REITs can provide a nice return when the commercial real estate market is healthy but got devastated when rents collapsed during the last recession. The higher return of REITs comes with a higher downside risk, so these are not for “set it and forget it” investors who check their portfolios once a year.
When cities need money for improvements and building projects, municipal bonds are how they raise that money. You can either research the best cities to invest money on your own or buy into a municipal bond fund. Municipal bonds offer tax advantages at the federal level and sometimes the state level as well. Due to those tax advantages, as you ladder up in your portfolio you’ll be more likely to have money in munies.
Investment Grade Corporate Bonds
These are securities issued by companies with a BAA or higher from Moody’s or BBB or higher from Standard & Poor’s. Since corporations can’t print money yet, corporate bonds carry a slightly higher risk than government bonds but also pay a higher interest rate. Corporate bonds give you the flexibility to shop different sectors and credit-quality characteristics to find the best returns.
Those are just a few ideas to get you started on income investing. Some people get so good at income investing that they can collect dividends from investments every month, like a paycheck.