What Is Income Investing?

Start Generating A Consistent Cash Flow From Your Liquid Investments

Whether you are retiring soon or you are still several years away, it is important to understand how you can generate consistent cash flow from your liquid investments through income investing.  

What is Income Investing?

Income investing is a method of investing that focuses on generating cash flow from your investment holdings. This may include holdings such as stock dividends, bond interest, or similar types of holdings.

This money is reinvested to accelerate the growth of your portfolio until you retire when it can be redirected to provide you with a “paycheck” to fund your spending needs.

Investment income commonly comes from three places: dividends from stocks, interest from various types of bonds, and distributions that come from a variety of investments that do not fall exactly into the stock or bond category. A few years ago, I created the Wes Moss Bucket System to explain in easy terms where your liquid investments should go in order to generate the kind of income that you would like.

The Income Investing Bucket System

1. Cash bucket. The cash bucket includes CDs and money markets. This is your emergency liquid cash fund. It is the money that helps you sleep well at night. People often wonder exactly how much money that they need in this emergency fund. The truth is, it will differ from person to person, and family to family.

 A great rule of thumb is to have six months of cash set aside in this bucket. 

2. Income bucket. The income bucket includes a variety of bonds including government and municipal bonds, corporate bonds, and high yield or junk bonds. It is ideal to maintain a blend of bond types to maximize return while protecting your principal.

Depending on that blend, the annual yield for this bucket typically ranges in the 1 percent to 6 percent range.

3. Growth bucket. The growth bucket is filled with US, international and emerging market stocks. Pure “growth” equities pay little or no dividends and are owned primarily for “capital appreciation.”  Think of stocks like Google or Amazon – fast growing companies that chose not to pay out their profits in the form of dividends. Income producing stocks are also expected to have some level of capital appreciation, but have significant cash flow to go along with it – typically in the range of 2 to 5 percent. These stocks can show up in nearly any industry segment, but are most prominent in one of the following four industry sectors:  consumer staples, healthcare, utilities, and telecommunications. 

4. Alternative income bucket. The alternative income bucket includes investments that don’t quite fit neatly into the growth or income bucket. Examples include pipeline and energy storage companies, Closed End Funds, and master limited partnerships. You could consider this your overall portfolio yield-enhancer as yields from these alternative investments can range from 3 to 8 percent annually.

The amount of money that you put into each bucket will differ depending on several factors including your age and your level of risk tolerance. Once you determined how to set up your buckets, the next step is to consider meeting with a qualified financial planner to discuss how to make your liquid investments work for you.  

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For valuable financial tools and information on how to set yourself up for a happy retirement, check these out:

Social Security Optimizer, Retirement Calculator, 401k Allocator, How Do I Stack Up Quiz, Money & Happiness Quiz, and You Can Retire Sooner Than You Think

Disclosure:  This information is provided to you as a resource for informational purposes only.  It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors.

  Past performance is not indicative of future results.  Investing involves risk including the possible loss of principal.  This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.