How the Income Investing Strategy Works

  • When working with a financial advisor to build a portfolio, you’ll be asked to take a particular approach. For example, capital preservation, inflation-adjusted capital preservation, value, growth, high growth, speculation, and income could all be on a pre-existing list from which you can choose. Your portfolio managers will strive to invest by this instruction, referred to as a “mandate.”
  • The goal of income investing is to generate enough income from your investments to cover your living expenses. This method may be used for various securities, including stocks, bonds, and exchange-traded funds (ETFs). This guide will teach you the ins and outs of investing to supplement your income if that is your goal.

Key Takeaways

  • The income investing approach aims to construct a portfolio of assets that generates the most significant possible annual passive income.
  • The majority of blue-chip equities are included in income strategy portfolios. This equity group has a history of stable or rising dividend payments and a conservative financial profile.
  • A portfolio based on an income strategy should have enough liquid assets to cover distributions for at least a year.
  • The benefits of compound interest are lost if investment income is not re-invested, which is the case with an income investing approach.

The Goal of Income Investing

  • Building a portfolio of assets to provide the most feasible passive income each year is the goal of the income investing approach. Income portfolios are primarily designed to offer customers a regular source of supplemental income.
  • Imagine a couple where the teacher makes $40,000 a year, and their husband makes $55,000 as a real estate salesperson. Together, they have a $95,000 gross income. Let’s say that someone inherits $1,000,000 from their aunt’s estate. They may improve their annual income by $40,000 by opting for an income plan that generates annual distributions of 4% from their portfolio.
How the Income Investing Strategy Works


  • Those who suddenly come into a significant amount of money (via the sale of a business, an inheritance, or a lottery win, for example) have the opportunity to build an income portfolio and, in effect, get a second wage.
  • The $1,000,000 would be utilized as a family endowment, similar to how one may use a savings account for higher education costs. It’s money that never leaves the bank, invested only to create more money to invest elsewhere. This tactic is often used by retirees who, having stopped or drastically reduced their employment, require supplemental income to cover basic living expenses. 
  • This approach may be helpful with the rising number of young people participating in the more common “gig economy,” where earnings might be very irregular. The investor is free to spend the money earned from the portfolio any way they see fit, whether on necessities like food and shelter or more lofty goals like helping the less fortunate or sending a loved one to school.

Types of Holdings in an Income Portfolio

Each income portfolio will be uniquely constructed. Thus, a wide variety of assets and dollar quantities may be included. Nonetheless, all investors need to spread their money around in different ways.

Blue Chip Stocks

Blue chip companies are a staple of most income strategies’ stock allocations. Well-established, market-leading corporations guarantee these dividend payments. Blue chip companies like Walmart and Disney. These portfolios are also on the more conservative end of the spectrum, as seen by their dividend histories and ability to maintain or increase dividends per share despite market volatility.


Fixed-income products such as bonds may also be utilized. The account’s tax characteristics will determine the answer. Holding tax-free bonds, for instance, is counterproductive if you’re using a tax shelter such as a Roth IRA. You may get more favorable tax treatment for your taxable assets by putting them in this sort of account. 

Real Estate

  • Real estate, either directly owned or held in the form of a real estate investment trust (REIT), is another frequent asset for a diversified income investment portfolio. Since real estate investment trusts are more vulnerable to market fluctuations, they should be treated as a higher-risk component of the portfolio. However, some degree of risk is only sometimes undesirable when other resources are available to counteract it. An intelligent investor who purchases real estate at the right moment might amass substantial wealth via a REIT.


As a result of the 2008 financial crisis, REITs together saw a 70% decline in market value as rental distributions were slashed. The good news is that some investors who acquired REITs during the height of the crisis have already received dividend payments equal to their initial investment.


  • MLPs, or master limited partnerships, are a special kind of limited partnership that, like stocks, may be purchased via a stock market. Companies owned by MLPs are exempt from income tax at the federal and state levels. Instead, the investors who own these assets are responsible for paying the taxes on their share of the revenue. 5
  • Higher dividends from MLPs are a good option for income investment portfolios because of their tax benefits.


  • Profits are seldom generated from cash on hand and similar liquid assets. Instead, this portion is set aside as a reserve, protecting against a cash shortage. Large-scale examples are the Federal Deposit Insurance Corporation’s (FDIC) checking and savings accounts and the United States Treasury note. However, they may be included in a passive income portfolio if principle preservation is a priority.
  • If the other assets in the portfolio suddenly stopped paying dividends, the conservative income strategy portfolio should have enough cash to cover expenses for at least a year. Put your extra cash into a savings account, a money market mutual fund, or a money market account if you want to earn interest on your money.

Pros and Cons of Income Investing

  • Extra money is the obvious benefit of going this route. Earnings might be low. Nonetheless, you can trust it for the most part. In addition, less effort is required. You may improve your monthly cash flow by increasing it when you combine it with additional sources of revenue.
  • The only drawback is that you won’t benefit from compound interest. That’s because your hard-earned cash never goes back into expanding your business. Let’s pretend you invest $100,000 in a portfolio that yields 5% annually. You can earn $50,000 after ten years. You would have had $62,889 more at the end of the period if you had invested the money instead of taking the rewards.
  • Finally, it is more difficult for an investor to use all available instruments when using an income plan. Deferred tax leverage, for instance, is continuing to earn interest on investment while avoiding paying taxes on the interest. It may help you avoid having to fork out a lot of cash in taxes if you move or withdraw money.

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