For the you the quiet reader of my articles, here is my simple path to income investing. I think passive income investing is as easy as can be. Just about anyone can achieve it I’m certain.
Today, I’m sharing with you how we approached our income investing. We approached our income investing using the simple path we mapped out years ago – I’m sure that with some thought, you could use this method for your own circumstances too.
Our Version of The Simple Path
True passive income is most easily achieved from income investing and is achieved following these two easy steps:
- Create a high yield 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.
Our growth style investing friends will poo-hoo me at my version of the simple path and ply me with the mathematics about compounding and tax implications.
However, these same people will fall rather silent in times of market drops, market volatility and sustained sideways markets (namely, the lost years … google it) especially if they are relying on selling off portions of their portfolios for income.
We on the other hand will have real dollars quietly rolling into our pockets every month no matter what.
As income investors following the simple path, we believe that actual cash-flow beats paper profits hands down – just ask any successful business owner.
The Simple Path of Income Investing is a Lost Art
It’s no secret that income investing has gone out of style in recent decades – growth style investing has been certainly been the flavour of the modern era.
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 shattering array of spreadsheets and theoretical graphs measuring paper profits to prove the point)
However, when we peel back the layers, what we all need is income – cash in our pocket every single day that we can live off confidently.
The simple path to income investing done well, will produce steady, reliable & passive income streams irrespective of market and political gyrations.
Passive income investing means you will sleep well at night, have all your bills and living expenses covered and also get an automatic pay rise every year.
The simple path to income investing will give you the freedom to live the life you want to live – a purposeful life.
Step 1 – Build a High Yield Portfolio
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.
Here are some examples of the types of assets you may include (in no particular order):
- Corporate bond closed end funds (paying monthly distributions between 7% – 12%)
- Real Investment Estate Trusts (paying monthly or quarterly distributions above 7%)
- Covered Call Index Funds (paying monthly distributions between 8% – 10%)
- Quality High Dividend Funds (paying quarterly dividends above 6%)
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.
I suggest a fund with at least 10 years of trackable history and very steady income distributions. I also suggest that you have at least 5 funds in this initial portfolio (and no more than 10)
The singular aim of this initial portfolio is to build up an income stream to replace your 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.
Now, the next step is to adjust the type of income producing assets we purchase and create a separate portfolio of income growth assets.
Step 2 – Build an Income Growth Portfolio
Passive income investing for the longer term means thinking ahead.
Unlike the initial high yield portfolio that covers our base expenses, this next 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 first 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 high yield 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.
Here are some examples of the types of assets you 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
- (REITs) real estate investment trusts, companies and funds
- Well established infrastructure companies and funds
Often, these products are designed specifically with income growth investors in mind. Often they will state this as part of their objectives e.g. “To provide the investor with a growing stream of income over time”.
Doing your 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 eventually overtake the high yield portfolio in both capital value and income produced – but it is a longer game.
Whilst we could start with this second portfolio as our first portfolio, it would take many extra years to realise freedom via passive income. Most investors would tire of the process.
The Simple Path to Income Investing – It Works
Over time, the snowball effect of our income investing efforts become well and truly evident.
Nowadays, more money now pours into our investment accounts from dividends, distributions, royalties, advertising revenue and interest than we are actively putting in ourselves.
It’s one of the best feelings in the world.
Some days we find it hard to believe that twenty years ago I was sweeping factory floors and we both were doing two cleaning jobs at night to put food on the table.
Our knowledge has snowballed. Our confidence has snowballed.
by following the simple path to income investing our financial competence has snowballed and the fear of how to pay the bills has slowly but surely abated.
If it all disappeared tomorrow, we would confidently be able to start again using the same simple path and regain our position much quicker than the first time. We would do that by using what we now know about the simple path to income investing.
Financial independence is not the be-all and end-all to life. We do not subscribe to the strict frugality/minimalism crowd as this makes us feel negative and engenders a mindset of lack. However with a steady cash flow from passive income occurring, life opens up and a host of new possibilities shine in.
Wealth sometimes just comes softly – it has with us and it continues to do so.
The repetitive application of the principles of the simple path to income investing has changed the course of our lives. We will always be grateful for that.
So there you have it, that’s the simple path to income investing in two easy steps. It works.
Cheers
