What Is Income Investing?
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What Is Income Investing?
Simply stated, income is money received. Income comes either from active employment, such as a job, or from investments that work for the investor. Many people have an income objective—that is, they invest to receive income for their present financial needs. On the other side are growth investors, who defer income until some point in the future. The goal of growth investors is to grow the value of their investments over the course of time. Growth investors understand that they will receive little or no income from their investments during the present. When you invest, you must decide whether you want income now or in the future. Making this decision will determine the types of investments you choose.
Things To Know
- An advantage: income investments tend to be less volatile than growth investments.
- A disadvantage: you must have a lot of money invested in order to earn substantial income.
Income vs. growth
There is a way to distinguish income-oriented investments from those that seek growth. Income investments provide steady interest or dividend payments. Interest is paid on debt investments such as bonds. Dividends come from the earnings that equity or mutual fund investments make. Growth investments, on the other hand, provide scant and unsteady (if any) dividends because the companies that issue them may reinvest profits to finance future growth.
Pros and cons of the income objective
The income objective has advantages and disadvantages. The most well-known advantage is that you can receive money now. Another is that, on the average, income investments tend to be less volatile than growth investments. This makes it harder for them to lose their value. A disadvantage is that one must have a lot of money invested in order to earn substantial income. For instance, to earn $30,000 per year from a security, one may need to have hundreds of thousands of dollars invested. Income investments generally grow slowly in value; inflation may erode their real value as years go by.
Income investments are popular among investors with low risk tolerance. They are also popular among retired people, who may need income after they stop working.
