What are Income Investors?

Are income investors the rock stars of the investing world?

If investing were music, you could argue that income investors are The Rolling Stones. No matter how long it’s been since they recorded (I Can’t Get No) Satisfaction, they continue to get royalty checks because the song is in regular rotation on every classic rock radio station in the country, and will show up on every new live album and box set release for decades to come.

Similarly, income investors buy an investment, and that investment continues to reward them with cash just for that one-time purchase. Of course, there’s a little more to it than that, but the general idea is that income investors are devoted to finding top-quality investments that generate steady and secure cash flow with minimal risk.

Saving for retirement is the tired old idea that you spend your working life filling up a bucket of money and then start ladling it out slowly when you retire. But any money that you have in an actual savings account is pretty much wasted, since your rate of return on a bank savings account guarantees that your money will be constantly losing purchasing power as inflation eats away at it.

By contrast, income investors have an eye toward building wealth for retirement through strategic investments. There are a variety of income investment types, including dividend stocks, real estate investment trusts (REITs), master limited partnerships (MLPs), business development companies (BDCs) and bonds. Regardless of which income-generating vehicle they choose, most income investors work to minimize risk and protect their portfolio against huge losses.

But even many investors who turn to the stock market for income ignore 1% or 2% yielding stocks because their yields are “too low.” Stocks in these brackets, however, are often the best long-term income investments because they have greater ability to grow their dividends over time.

The most successful income investors who want yield without (too much) risk have successfully found it using high dividend blue chip stocks. And though a high yield may be risky in some cases, not all of the highest paying dividend stocks are high risk.

For even greater income, income investors take advantage of dividend reinvestment plans. You’ve probably heard it said that compound interest is the most powerful force in the universe (a quote attributed to Einstein, almost certainly erroneously), and dividend reinvestment plans (i.e. DRIPs, or DRIP plans, as many redundantly refer to them) take advantage of some of the same forces—namely time and compounding.

As an income investor with a portfolio full of dividend-paying stocks, it can be tough to keep track of when your next dividend payment might arrive. If you’re retired and relying on that income to live on, it makes sense to spread those dividend payments out. That’s where an ex-dividend date calendar can come in handy—an ex-dividend calendar tells you the date that each stock in your portfolio (or stocks you’re considering buying) will pay its dividend. The key is finding stocks with ex-dividend dates in different months. That way you can have a portfolio in which you have at least one dividend payment in all 12 months, so that you always have a steady stream of dividend income.

The ultimate goal of an income investor is to create an income stream that’s reliable, and not price-dependent. The best income-generating investments keep paying investors to own them regardless of what’s happening to their stock price.

If you want to dip your toes into investing, download our FREE report, How to Invest in Stocks: How Stocks Work, How to Calculate Return on Investment and Other Investing Basics.