Investing for income: 7 money-generating assets for your portfolio and how to get started - Business Insider

Investing for income: 7 money-generating assets for your portfolio and how to get started

10/27/2020 2:11:00 AM

Investing for income: 7 money-generating assets for your portfolio and how to get started

Business Insider is a fast-growing business site with deep financial, media, tech, and other industry verticals. Launched in 2007, the site is now the largest business news site on the web.

skaman306/Getty ImagesThe goal of investing for income is to generate a reliable cash flow from your assets at low risk.Common investment income assets include dividend-paying stocks, bonds, real estate, annuities, CDs, and money market accounts.

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Though they're traditionally associated with older investors, any portfolio should include some income-producing assets. Visit Insider's Investing Reference library for more stories.You can classify investors into two basic types. There are those who want appreciation — that is, they invest for growth. And there are those who ask of their assets "show me the money — now." 

We call the latter type income investors. Income investing involves building a portfolio using dividend-paying stocks, bonds, real estate, and other assets designed to generate cash on a recurring basis. With income investing, once you buy the asset, there isn't a whole lot more to do. This is buy-and-hold

passive investingat its best. There are multiple types of investment income assets, and ways to invest for income. Here's a rundown of the most common.1. Dividend StocksWhat they are:Dividend-paying stocks are issued by companies that make cash payments per share, generally quarterly, based on how well the company is doing. The two main types of dividend stocks are called common and preferred.

How they work:Common stock dividends are set by the company's board of directors each quarter. You won't know the amount or even if there will be a dividend until the board decides.Preferred stock dividends are more regular: pre-determined, fixed payments over a specified period of time. Also, preferred stockholders their dividends before common stock shareholders get theirs. 

Although common stock dividends are riskier, you stand to gain more. Preferred stock dividends are less risky, but generally lower.What to know:The most consistent, good dividend-payers tend to be from blue-chip stocks — that is, those of large, well-established corporations. 

How to tell if a dividend is a good one? Look not just at the dollar amount, but at the dividend yield: that is, the company's annual dividend divided by its stock price and multiplied by 100. (It's often indicated on a stock's online listing.)

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Aim for stocks that pay a 2% to 6% dividend yield. That ratio indicates a decent payout relative to a company's earnings and market valuation and helps you avoid companies that may be borrowing excessively to inflate their dividends.2. BondsWhat they are:

Bonds are loans to the government or a company. Your income from bonds comes in the form of fixed-interest payments. As the bondholder (lender) you receive a fixed amount of interest income on a regular schedule. When the loan term ends, you receive your original investment back. 

How they work:The rate of interest you receive on a bond depends on the length of its term — the longer, the higher — the creditworthiness of the borrower, and the conditions of the market. There are three main types of bonds: Government bonds, also known as

Treasuries, are considered extremely reliable because they are backed by the U.S. government, but the tradeoff is a relatively low interest rate.Municipal bonds are a form of government bonds issued by states, cities, counties, and other government entities. Interest is exempt from federal taxes and often from state and local taxes as well.

Corporate bonds are issued by companies (both public and private) and therefore riskier than government bonds. For that reason, they pay a higher interest rate than government bonds. depending on the creditworthiness of the issuer.What to know:  Bond prices tend to go up when the stock market goes down, making bonds a good tool to balance risk from equities, as well as an income source.

3. Real Estate What they are:Although it can and does appreciate, real estate often provides a solid cash flow as well. The income derives from rents paid by tenants of residential, industrial, or commercial properties, and sometimes from mortgage interest on the properties as well. You don't have to become a landlord: REITS and RELPs are common ways to invest in real estate indirectly. 

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How they work:Real Estate Investment Trusts (REITS)let you buy shares in a publicly traded company, which pays dividends to you much like stocks. The dividends can vary in both amount and frequency. REITs invest in a variety of projects and are considered ongoing, long-term investments. 

A real estate limited partnership (RELP) lets you pool your money with other investors to buy or develop real estate properties in a private (i.e., not publicly traded) investment. Formed to operate for over a period of years, a RELP offers excellent dividend payments annually, though the big money comes via distributions when the projects are complete and sold towards the end. As with a REIT, a RELP pays fluctuating dividends based on the type of real estate investments it makes. 

What to know:  Dividends in both cases are not fixed but can vary, depending on the profit/rent income received by the REIT or RELP. You stand to gain more with a RELP over a specific, shorter period of time than with a REIT. However, because they don't trade on public exchanges, RELPs can be harder to unload; REITs are much more liquid. 

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