My Income Investing Strategy - My Passive Income Journal

With the new year approaching and resolutions being pondered, I thought I would rattle the typewriter keys and tell you about my income investing strategy.

My income investing strategy is poo-hoo’d by many of my friends and acquaintances, but that’s OK, because it works for me. And it works superbly well. Even though I have written about it previously, this article will approach the topic of my income investing strategy a little differently.

Why Do I Invest For Income?

My logic is this – coins in my pocket that I can spend is my primary aim. I want the cash to flow with near zero effort from me (passive income) and I also want my income from investments to keep up with inflation too. I do not want to think about the stock market (or any other market for that matter) and worry when to buy and sell, nor do I want to be bothered with capital gains tax from selling. I just want a regular, passive, natural, flow of cash from the profits of my investments. I also need my portfolio to keep up with inflation as a minimum.

I have spoken to so many investors over the years and it seems to me that whatever investing style they choose (or flick between) is all based on accumulating the maximum amount of wealth. Then, it dawns on them at some point that they need this wealth to be their future source of income. That’s when the trouble starts – how to easily extract an income from their chosen investments. The older we get the more troublesome extracting an income from investments becomes – it needs to be easy.

My Three Stage Investment Income Portfolio

My income investing strategy has three distinct stages. As follows:-

Create a cashflow portfolio first. Invest in quality high-income producing assets until all basic life expenses are covered by this income.
Next, create an income growth portfolio. Invest in quality assets that increase their income year on year.
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.

Lets now talk about each three stages separately

Stage 1 – Cashflow

I know I’m in the minority when I say this, but maximizing steady, reliable & passive income streams first is the key.

This is done by regularly buying 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.

Here are some examples of these types of assets (in no particular order)

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 of this first stage is to build up an initial portfolio of these diversified assets in order to replace our base income requirements as quickly as possible.

There is a YouTuber I like to listen to that focusses primarily on this stage of investing called Adrian – check his channel out here.

Once our base expenses are covered by the income produced by this cashflow 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.

Stage Two – Income Growth

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

Income investing for the longer-term means thinking ahead. Unlike stage one that covers our base expenses, this next stage is focused on growing that income passively over time. This income growth portfolio will ensure 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.

Some examples of these types of assets are (in no particular order)

Dividend Growth Funds
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, these income growth holdings in stage two will overtake the cashflow holdings of stage one 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 income freedom via passive income and most investors would tire of the process.

There is a YouTube channel I enjoy that focusses specifically on the dividend growth component of income growth investing – check it out here.

Stage Three – Become an Entrepreneur

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
Repeat sales on self-created courses/plans/patents
Rental income from an investment property portfolio managed by an agent

Conclusion – My Income Investing Strategy

Our growth style investing friends may scoff at this three step strategy (as would our real estate investing friends) 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 cashflow trumps paper profits every time – just ask any successful business owner. Hopefully you found my income investing strategy to be helpful!

Cheers

Hugh Walker