Six ways to create investment income
What did we all learn during this past decade? The one that gave most stock investors negative returns? What I learned was to generate income.
Instead of buying, holding and hoping, you can find investments that actually produce income. Many of you have already learned and applied this lesson. But here are a few general ways to increase your investment income.
Of course, the most common way to make income is buying bonds. There’re many different bond types. Treasury bonds. Municipals. Corporate. International. Emerging market. You get the idea. To research the different sectors and styles visit InvestingInBonds.com. It’s geared towards novice investors and provides basic, easy-to-understand information.
Also, when investing in bonds right now, you want to consider short-term maturities. This does lower your income but should protect you better when interest rates start rising.
Not all companies pay a dividend. Yet some pay high income and have a history for steadily increasing those payouts. What you want is a solid company that doesn’t pay too much of their income as a dividend. That way the income stream is more sustainable.
Preferred stock is a stock that acts like a bond. The holders are first in line to get dividends. In a downturn that can come in handy. Sometimes the preferred share owners even get shares that accumulate interest in the event that the company can’t pay temporarily. Then, when their earnings improve, you get the back dividends paid to you.
REIT stands for “real estate investment trust.” Most REITs own physical properties or mortgages. As a REIT investor you get, by law, 90 percent of the cash flow profits as a dividend. If the REIT makes more you make more. Plus, real estate is usually a good inflation protector.
With all four of these, it’s preferable to own a diversified mutual fund. A fund spreads out risk and provides professional management for a low fee.
CDs AND FIXED ANNUITIES
CDs are a very conservative way to invest for income. The problem now is the interest rates are so low. These super-safe investments will blossom again when rates get higher. Don’t get tempted to lock-in a long-term CD. The rates for a five-year certificate are still very low. Consider alternatives.
Closely related to CDs are fixed annuities. Please don’t confuse these with their very-popular sibling, the variable annuity. Variables invest in stock, bond and international markets, rapidly changing in value.
Fixed annuities are tax-deferred vehicles that pay a guaranteed fixed rate. The value does not go down. Be sure to read all of the fine print. Technically, these are insurance contracts, and you need to be aware of the details.