Investment portfolios in general have changed a lot over the last century. Years ago, investors chose to invest in order to secure another form of income. Instead of trading stock, they held on to them and used the dividend money as income. This is called income investing.

Today, income investments are more common among retirees than other investments. Having monthly income investments during retirement helps to replace lost income, but it can also be useful for younger investors. It all depends on your goals as an investor.

Income vs Returns

If you’re having trouble deciphering between a fixed income investment and other investments, it’s important to learn the difference between income and returns.

Income is defined as money received on a regular basis. Returns on investments can be categorized as income, but not all returns are income. For example, capital gains aren’t realized until shares of stock are sold. It isn’t regular income. On the other hand, dividends are paid on a quarterly basis, which is regular income.

If your goal is to increase your wealth, the fastest, most efficient way to do this is through reinvestment. When you receive dividends, it’s best to reinvest them to gain more stock that will earn more money. However, if your goal is to add extra income, you would keep the dividend money and use it for monthly investments.

Benefits of Income Investing

Income investing is beneficial for those that need extra monthly income. If you have money in the bank and you need extra income, you might be able to bring in enough extra income each month through investing. This could mean skipping an extra part time job or other work you don’t want to do. After all, investing is all about getting your money to work for you.

Retirement income investing is a great way to secure your retirement or retire early. For example, if you are worried your pension won’t be enough to support yourself during retirement, securing some fixed income investments while you’re still working will help give you extra income.

Do you want to retire early? You can’t access retirement income from tax-advantage accounts until age 59 1/2, except through certain circumstances. Supplementing your regular retirement account with other investments that can later be used as retirement income is a great way to have the income you will need later. You can invest the money in whatever you feel comfortable with now and move your investments to income generating investments later.

Dividend Stocks

Dividends stocks are stocks that pay high dividends. Some corporations don’t pay any dividends to stockholders. These are typically newer companies that are focusing on growth. Fixed income investing should include dividend stocks that pay out about 40 to 50% of income to stockholders in the form of dividends.

Dividends are paid out on a quarterly basis. While you build up your investments, you can reinvest these dividends. When you need the income, keep the dividends. Typically older, more established corporations pay higher dividends and are good for income investing.

Bonds

Bonds are another investment security that can be used as an income investment tool. Purchase bonds that pay interest throughout the period instead of as a lump sum upon maturity. This could include government bonds, corporate bonds, or many other types of bonds. Municipal bonds are a great choice because you don’t have to pay income tax on earnings.

Real Estate

Many investors believe real estate is one of the best fixed income investments because it not only gives regular income but it is tangible. When you own an apartment, you can see that it exists. Even when it’s not being rented out, you still own that property. However, it does take a little bit more time and effort to keep up unless you’re able to hire an apartment manager.

You can also invest in real estate investment trusts or REITs. REITs are sold in the stock market. You can by shares in a trust that holds a pool of commercial properties, mortgages and other real estate. It’s a way to invest in real estate without dealing with the specifics of it.

Should you Use Income Investing?

If you have extra money lying around, there is no doubt you should invest it. Even if that means just sticking it in a savings account. Don’t leave money under your mattress because the value will decrease over time. I’m not recommending putting all your cash in a savings account, but if that’s where you feel most comfortable, it’s better than nothing.

Whether or not income investments will be beneficial to you depends on your circumstances. If you want to retire early and you know you’ll need to live off the income of your investments, you can always change the type of investments you own later.

Also, remember that earnings are earnings. If you’re earning 10% annually on your investments, you can withdraw the money whenever you want, assuming it’s not tied up in bonds or CDs. If you want the money to come to you neatly without fees, stick with income investments. Otherwise, weight the options to find the best choices for your portfolio.