We now have more attractive yields on several types of income producing investments for the first time since the Great Recession of the late 2000’s. So, what can I invest in for income? In this short article we summarize 7 income investing strategies to consider and inspire you to do your own research.
We often think about income from our investments in four main ways:
- Withdrawals for short-term expenses and planned events (e.g., yearly vacation)
- Withdrawals for medium term planned expenses (e.g., car replacement every 5 years)
- Withdrawals for unplanned emergencies
- Portfolio income for long-term plans, (e.g., monthly retirement income)
The Federal Reserve’s reoccurring rate hikes since March 2022 have seemed to change the outlook for income investors. Also, the Federal Reserve’s moves to curb inflation appear to be working (?) and the Bureau of Labor’s personal consumption expenditures index has dropped from above 9% in June of 2022 down to under 4% mid 2023. As a result of this (and other factors) investors will still expect a more robust return on their income investments and hopefully benefit from any policy shifts ahead.
Ways To Invest For Income
High Yield Cash Accounts
At the moment, it’s entirely achievable to get between 3% & 5% yield on your cash in a bank or credit union. The use of cash for emergencies and planned purchases makes sense even in an elevated inflationary period. Liquidity is important.
Interest bearing cash comes into its own in these three scenarios previously mentioned.
- Withdrawals for short-term expenses and planned events (e.g., yearly vacation)
- Withdrawals for medium term planned expenses (e.g., car replacement every 5 years)
- Withdrawals for unplanned emergencies
Some polls are quoting figures that claim that more than 60% of Americans already live pay check to pay check. Additionally, most of us know that our wages have not kept up with the pace of inflation.
This is where quietly socking away cash into a high interest bank account can help avert some life challenges – If a $1,500 emergency arose, would it disrupt your ability to stay on top of things?
One very idealistic approach is to set aside three to six months’ worth of household basic expenses in a high interest cash account. Easier said than done, yes, but 100% worthwhile chipping away at to achieve.
One effective way to build such an emergency savings account, is to automate a set amount on payday straight into a dedicated emergency fund account. Even small amounts are worthwhile – it’s the regularity that makes it add up.
Bonds (Government and Corporate)
Bonds have done it very tough in 2022. It has been unexpected, and frankly, surprising, especially when bonds have always been toted as the safe, stable and steady option that cushion the fall in equities – well now we know that does not always happen. Thanks for that 2022!
The Morningstar U.S. Core Bond Index, (covering an array of government and investment-grade corporate bond markets) lost nearly 13% in 2022. This is the index’s largest annual loss since it began tracking in 1999. Most of the negative performance among bonds last year was apparently linked to the Federal Reserve’s rate hikes. As a result, many institutional analysts and portfolio managers have already revised their outlooks for bonds.
As the Federal Reserve hits the brakes on any further rate hikes, the challenges for bonds should quickly abate. Time will tell though.
Nevertheless, both Government and Corporate Bonds are still clearly quality additions to an income investor’s portfolio.
Don’t let a recency bias color our thinking about the importance of bonds.
Some investment analysts and investment houses conservatively (IMO) predict the following range of returns for bonds across the next decade.
- U.S. investment grade bonds (4% – 5%)
- U.S. high-yield bonds (5% – 6%)
- Global bonds (4% – 4.5%).
- Developed ex-U.S. bonds (5%)
- Municipal bonds (4.5%)
Real Estate Investment Trusts (REITs)
REITs own, operate and/or finance real estate. REITs normally include offices, apartment buildings, warehouses, retail centers, medical facilities, storage facilities, data centers, cell towers, infrastructure or hotels in their underlying holdings. For example, just U.S. public REITs alone own an estimated $2.5 trillion in assets across over 500,000 properties and more than 15 million acres of timberland across the U.S.
REITs normally are mandated by law to pay out at least 90% of their taxable income to investors (most pay out 100%), and their income yields are often higher than bonds. About 150 million American households own REITs through their employer-sponsored plans, IRAs, pension plans, and other investment funds … not to mention investors who hold REITs directly.
Multi-Asset Income Investments
In essence, a multi-asset income investment provides you with a single aggregated product that does all the investing for you. You just collect the regular income payments.
Multi-asset income mutual funds and exchange-traded funds (ETFs), can offer investors a diversified allocation of stocks, bonds and other types of income-oriented securities like bank loans, covered calls and currency hedges. Investors who prefer a growth-and-income strategy (the well understood 60/40 portfolio) sometimes incorporate a multi-asset income focussed fund to increase their income capacity and spread out their downside protection.
Annuities
Retirees are always on the hunt for retirement income that can keep up with inflation. Many retirees want a guaranteed, lifetime income stream to cover their basic living expenses.
Low-cost, straightforward annuities (many are neither low-cost or transparent – user beware) provide us with the pension-like regular payments they need. With some pensions failing and market volatility scaring the heck out of many investors, annuities might be a suitable way to complement a income investment portfolio with a predictable income stream.
With the advent of high inflation and policy shifts by the Fed, investors can easily doubt whether some of these strategies for income investing –bonds in particular – still make sense for their portfolios. Market conditions like inflation, economic slowdowns and policies can change very quickly, but the benefits of diversified investment strategies stand the test of time.
Preferred Stocks
Preferred stocks are technically just equities. So they do carry higher risks than bonds, but less risks than common stocks because they are ranked ahead of (hence preferred) common stocks in dividend payouts and in the event of a corporate liquidation. Like common stocks, many preferred stocks pay qualified dividends, which just means the dividend income is subject to lower tax rates than interest income from other income assets such as bonds.
Qualified dividends are typically taxed at zero, 15%, or 20% rates, depending on your personal income limits. These lower taxable rates can be a significant potential advantage for high-income earners.
Stocks that pay Dividends
Even though dividend-paying stocks carry a higher investment risk than bonds, unlike bonds with fixed coupon payments, companies that consistently increase their dividends can help shareholders keep up with inflation and uphold their buying power over time. When buying dividend stocks. search for companies that have dividend payout ratios between 40% to 50%, which means they retain their earnings to spur growth and retain margins of safety for challenging times. Of course, the biggest attraction of well-managed dividend stocks is that they also have the potential for steady capital growth.
What Can I Invest In For Income?
With the advent of high inflation and policy shifts by the Fed, investors can easily doubt whether some of these strategies for income investing (I’m staring at you Government Bonds!) still make sense for their portfolios. Market conditions like inflation, economic slowdowns and policies can change very quickly, but the benefits of diversified income investment strategies always stand the test of time.
So, what can I invest in for income? So many things – and in fact, this entire website is dedicated that that exact question. We already have over 120 articles dedicated to the topics of income investing, private incomes and passive income. So, enjoy looking around and if you have a topic that you’d like us to cover, simply send us a message on the contact us page and we will write one for you.
Cheers
