My Passive Income Journal

Income Investing

Income investing is nearly a forgotten art, yet it has brought me a quiet confidence and increasing monetary freedom.

Old money families have practiced income investing for centuries – I simply studied and applied that knowledge

The Forgotten Art of Income Investing

Income investing has gone out of style in recent decades – growth style investing has been certainly ruling the roost. Ask any modern growth investor and you will get a long list of compelling reasons as to why their way is the best (including a dizzying array of spreadsheets and theoretical graphs measuring paper profits to prove the point)

However, when we peel back all the noise, what we all need is income – steady, reliable, regular, passive, well diversified cash flow. Coins in our pocket every single day.

Income investing done well should produce steady, reliable & passive income streams irrespective of market and political gyrations.

Sort Your Cash Flow First

Contrary to popular advice, maximizing steady, reliable & passive income streams first is the key.  This is done by regularly acquiring assets that are specifically designed to produce the highest regular output of income coupled with the steadiest movement of the underlying capital. Additionally, these assets should have a fair and affordable cost structure.


General examples of these types of assets may include (in no particular order)

  • Corporate bond closed end funds
  • Well monetized websites
  • Specific types of Real Investment Estate Trusts
  • Certain types of Covered Call Index Funds
  • Selective High Dividend Funds

Often, these products are designed specifically with income/cash-flow investors in mind. Doing due diligence on these products prior to investing is an absolute necessity to ensure the fee structure, underlying assets, historic performance and product structure is sound and the issuer and management is reputable.


The aim is to build up an initial portfolio of these diversified assets in order to replace our base income requirements as quickly as possible. Once our base expenses are covered by the income produced by this cash-flow portfolio, we are essentially free from the stress of feeding and clothing ourselves and paying for shelter.  We could stop there and just enjoy a quiet life, however this would be short sighted indeed. 


The next step is to adjust the type of income producing assets we purchase and create a separate portfolio of income growth assets.

Income Growth Investments

Income investing for the longer term means thinking ahead.  Unlike the initial cash-flow portfolio that covers our base expenses, this portfolio is focused on growing that income passively over time.  This income growth portfolio will insure our income increases over time and keeps up with and/or exceeds average inflationary increases.

Assets that produce growing streams of income usually do not initially produce as much income as the assets in our cash-flow portfolio. Instead, these income growth assets lift their income outputs to the investor year on year. Whilst there is some overlap with the types of assets held in our cash-flow portfolio, usually the assets held in this income growth portfolio are based on steady growth industries where steadily increasing profits from consumer and industrial products support the year-on-year growth of distributed passive income to their investors.


General examples of these types of assets may include (in no particular order)

  • Dividend Growth Funds (both traded and untraded)
  • Individually picked companies that show a long history of dividend growth
  • Closed ended funds dedicated to steady income growth
  • Selected real estate Investment companies and funds
  • Certain infrastructure companies and funds

Often, these products are designed specifically with income growth investors in mind. Doing due diligence on these products prior to investing is an absolute necessity to ensure the fee structure, underlying assets, historic performance and product structure is sound and the issuer and management is reputable.


Over time this second portfolio of income growth holdings will overtake the cash-flow portfolio in both capital value and income produced – but it is a longer game.  Whilst we could start with this as our first portfolio, it would take many extra years to realise freedom via passive income and most investors would tire of the process.

Build Your Own Income Investing Asset

 For those of us that are more entrepreneurial, we might want to consider building income producing assets ourselves from scratch.  Obviously, this income would be aspirational whilst we are building the asset up, however building an asset from nothing through to being a truly passive income source is a very satisfying undertaking and often will produce much superior income flows than investing in a ready-made product.


However, being realistic is important. Building an asset that will sustainably provide passive income for the long term takes patience, persistence, resilience and lots of up-front labor.


General examples of these types of self-made assets may include (in no particular order)

  • A business that is managed by a manager/board on your behalf
  • A portfolio of income-producing websites managed by writers and technical staff
  • Shares in a business where we are a silent/angel investor
  • Royalties on successful literary products (think Harry Potter for example)
  • Repeat sales on self-created courses/plans/patents
  • Rental income from an investment property portfolio managed by an agent

Income Investing - The Three Steps

So in summary, passive income derived from income investing is achieved following these three steps:

  1. Create a cash-flow portfolio first. Invest in quality high-income producing assets until all basic life expenses are covered by this income.
  2. Next, create an income-growth portfolio. Invest in quality assets that increase their income year on year.
  3. Finally, build an asset from scratch. Be entrepreneurial and build an income producing asset from scratch. With your other two portfolios already built, there will be time to build an asset properly so it grows into a generational asset.

Our growth style investing friends may scoff at this three step strategy and ply us with mathematics about compounding and tax implications. Nevertheless these same people will fall mysteriously silent in times of market drops, market volatility and sustained bear markets especially if they are relying on selling off portions of their portfolios for income. 


We on the other hand will have coins quietly rolling into our pockets every month whatever the weather.  As savvy income investors, actual cash-flow trumps paper profits every time – just ask any successful business owner.