While maintaining an ongoing income stream is particularly helpful in periods of market volatility and rising inflation, constructing a portfolio designed to generate a steady flow of income can be beneficial, no matter the economic environment, your risk tolerance or where you are in your financial journey.
Fortunately, investors have many options to choose from when looking to include income-producing investments in their portfolios. Still, all income is not created equal. Some elements that need to be considered, such as reliability, the safety of principal, the potential for growth of principal and tax considerations. An investor’s approach will vary, depending upon their situation.
Dividend-paying stocks – Investors who own dividend-paying stocks have a way to generate passive income while maintaining an ownership stake in a company. When that company generates revenue, it may issue dividend payments to stockholders for each share (or portion of a share) of stock owned. Often, this is done on a set schedule – usually a quarterly basis. There is often a target payment; however, should a company underperform, dividends may be lowered. The value of stocks may fluctuate day to day.
Income mutual funds – Mutual funds are professionally managed investment vehicles that pool investor assets together to “mutually” purchase a portfolio of investments (which usually share a common characteristic: large-cap stocks, corporate bonds, US government securities, global securities, etc.). Income-oriented funds seek current income through dividend distributions or interest payments. The value of your underlying investment may fluctuate.
Individual government and corporate bonds – Bonds are fixed-income investments created by companies, governments or governmental organizations who need to raise income. Investors in these securities are essentially loaning money to the issuing entity. In return for this loan, the investor receives scheduled interest payments over the life of the bond. While the initial investment in the bond is repaid at maturity, prior to the maturity date, the value of the bond may fluctuate.
Tax-free bonds – Municipal bonds are issued by local governments, public organizations (such as hospitals and schools), and other local entities to fund operations or finance specific projects like highway improvements or new building construction. The income generated by these securities is often federally tax free and sometimes tax-free at the state and local levels as well. While the initial investment in the bond is repaid at maturity, prior to the maturity date, the value of the bond may fluctuate.
Money market funds – Like other mutual funds, money market funds pool money from multiple investors in order to invest in different investment vehicles. However, because money market funds are considered low risk, the amount of income they generate is relatively low. It’s important to note that money market accounts are bank products and differ from money market mutual funds. While unlike money market accounts, their mutual fund counterparts have no FDIC guarantee. However, money market funds tend to offer higher returns than money market accounts.
Real estate – Investors don’t need to become a landlord to generate income from real estate. Investing in a real estate investment trust (or REIT), or companies that own or finance income-producing real estate across a range of commercial real estate sectors is an effective income producing strategy because REITs must pay out 90 percent or more of their taxable profits to shareholders in the form of dividends. Like other pooled investments discussed above, there is the potential to lose money.
Importantly, with the wide range of income-producing investment options available today, most investors can find a solution that aligns with their unique financial goals, risk tolerance, and time horizon. However, choosing the best portfolio investment strategy for your situation can be challenging without the guidance of a knowledgeable financial advisor who understands the benefits and risks associated with each income-generating asset class. The financial advisors at SageView offer objective, informed guidance to support your wealth goals. Find the right advisor for you and your situation today.