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Ok, let’s take a look at income investing. What it is, why I or others do it, how it works, and whether it’s even worth the effort.
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What is Income Investing?
Well, as simply as I know how to say it, to invest for income means taking a sum of money and using it to spin off cash. Cash used for everyday living, cash for reinvestment, or literally anything we could dream up. For a more detailed discussion here is an article from Fortune.com, “Income Investing: A strategy of building a portfolio of dividend-paying assets”.
Before we move on, an investor should take note that income investing wouldn’t make much sense if maximizing returns is the primary goal. That isn’t to say income investing can’t grow, it’s just that growth isn’t the foremost objective.
There are a number of more traditional avenues to income investing such as, bonds, treasuries, CD’s, money market funds or even real estate. However, I think the best of the bunch is income investing with options but that’s just my personal opinion. The more traditional approach prioritizes safety of the principal balance while earning the income. With options, principal retention is at the forefront but there is added risk which certainly wouldn’t make sense for everyone.
Ultimately, income investing is used by investors to generate a return in cash. What they do with that cash is up to them.
Why do I Invest for Income?
Full disclosure, most of my portfolio is focused on growth. At 40 years old, a portfolio dedicated solely to income investing wouldn’t be an optimal strategy in my opinion. However, some level of income generation acts as a buffer to a downtrend in the market. We’ve been in a relentless bull market for as long as I can remember but will that last forever? I don’t know, but if the market does eventually turn, I’ll at least be thankful I’m earning something instead of watching my portfolio balance just fall.
Others I’m sure will have their own reasoning for choosing to invest for income or not but I’m looking for two things out of my income generating portfolio’s. One, I want the minimal downside protection the income stream will provide. And two, I want to take vacation’s but I don’t want to pay out of pocket for those trips. That’s it, there is no other reason I have use for income from my portfolio as it stands today.
How Income Investing Works?
How it works will largely be determined by what you hope to achieve. As I’ve shared in the previous paragraph, I want to travel and that costs money. Rather than just use the money I currently have, I hope to keep that money invested and earning while simultaneously using the income as a form of vacation financing. That said, how it would work for you may be dramatically different once the ultimate goal is determined.
For the more traditional approach, an investor would simply purchase or invest in an asset that returns a guaranteed yield. Think money markets, treasuries, or certificates of deposit. Typically, none of these would be at the mercy of the overall market and the investor would sacrifice the potentially larger return to receive a consistent pay out instead.
For those more inclined to options, determining how it works may be even more complex as there would be strategies, strikes, expirations, or even adjustments to determine. None of which should be scary, they’re just additional complexities that may or may not make sense for everyone.
For me, I utilize two different techniques. One, I passively invest into high yielding options ETF’s. Two, I trade the poor man’s covered call for income. Both strategies essentially accomplish the same goal but with the poor man’s covered call I have more control over the outcome. Using the passive ETF’s I’m just accepting whatever the fund can achieve. Neither is better in a general sense but having the ability to adjust or improve a position is more than worth it for me.
Is Income Investing Worth the Effort?
This will be up to you and will need to be determined before ever having entered the arena. Investing in a way that yields a cash return wouldn’t be worth the effort if maximizing returns is the primary goal. On the other side, if there is a need for cash today, then income generation could make perfect sense. It just depends on the person and the situation.
Investing for income can be done mostly passively but for those interested in options, there is some amount of work to be done. Passive income investing doesn’t require much if any involvement outside of just transferring the money as it’s needed. With dividend reinvestment being mostly standard now day’s the cash return can just be reapplied further simplifying the process. In that light, it’s definitely worth the effort, since the effort is minimal.
Final thoughts
Investing to earn an income isn’t for everyone. But for those interested in the prospect of income generation they would be well served to continue researching the topic. Spinning cash off of an investment is a real eye opener for those new to the investment landscape. I know when I started, all I knew was put some money into the stock market and just let it sit there. Once I realized I could get that money working for me today and into the future I was hooked.
Options offer investors a way to leverage their principal balance and maximize income with risk. Traditional approaches to income investing offer a modest income with little to no risk. Either can make sense or neither can so it’s important to know what you want to achieve.
Until the next post.
God bless,
Jeff
