5 Types of Income Investment Strategies and How They Work (2024)

If you’re at the point in your life where you’re working towards financial planning and financial freedom, it’s essential to learn about different income investing strategies that can help you produce a fixed income on a regular basis.

Each income investing strategy comes with its own ups and downs, so it’s important to understand each one and figure out which works for you. Choosing the right strategy is all about building an investment portfolio that lets you generate enough income, whether to supplement your working years or for your retirement.

What Is Income Investment Strategy?

An income investment strategy is an approach to investing that is focused on income investing. This means you are more focused on investments that generate income instead of capital gains.

Income investors go after investments that will give them a passive and steady stream of income, whether it's monthly or annual income. So these investment strategies focus more on interest payments from bonds, stocks, and the like. These strategies guide any investment decisions that you will make to improve your income investing portfolios.

The 5 Types of Income Investment Strategies

Depending on an investor's goals and overall risk appetite, the investing strategy differs. There are several strategies that can be adapted, but there are common ones that investors of varying expertise usually dive into to add income-generating assets.

Before choosing an income strategy, it's critical that you understand your financial situation because the strategy you choose should be aligned with where you are financially.

Here are the 5 types of strategies for income investments that you can adopt:

Dividend Paying Stocks

When you own a stock, you become a company's shareholder. Once that company earns revenue, the money can either be put back into the business or shared with shareholders. This money that shareholders get from the company is called dividends.

Because of the regular potential income that you can get from a dividend stock, this is one of the most common passive income strategies that investors choose.

The dividend yield is one statistic that income investors should take into account. The yearly dividend stock payout to shareholders is indicated by a stock's dividend yield, which is commonly stated as a percentage of the share price.

If you're investing for income, it's important to note that not all companies actually pay dividends to their stockholders. If you want to use dividend stocks as your strategy to get passive income, select companies that have stocks that have this benefit.

Selecting this strategy to help your income investing portfolio is risky because you're relying on the profits of the companies. Even stable companies can suddenly experience situations where their profits become dried up.

How It Works

The cycle of dividend-paying stocks starts with a company earning profit. Once a company earns profits, the board of directors approves a plan to share the profits with shareholders in the form of a dividend.

Once everything is decided, the company will announce when the dividends will be paid. Dividend payments happen either quarterly, monthly or semiannually.

When it comes to dividend stocks, the distributions are paid in fractions per existing share. The pay share that a shareholder owns depends on the stock dividend issued by a company. If a business declares a 5% stock dividend, it will issue 0.05 shares for each share that a shareholder owns.

Real Estate

Investing in real estate purchases is one of the best ways to have a consistent income stream that can counter inflation.

There are two ways that you can use real estate as part of your strategy for income-generating investments. You can either generate regular income by collecting rent from your tenants if you have your own rental properties, or you can invest in publicly traded real estate stocks instead.

Real estate investing involves risk, but it is a good option for long-term growth.

How It Works

For direct real estate investment, you can buy properties directly, but it will cost a lot of money upfront. It's also not very practical if you're investing for income.

For investors that prefer to have an easier way to liquidate their assets when they need cash, the real estate investment trust or REIT is the way to go. REIT is a company that owns and operates income-generating real estate.

REITs have a very simple business model. What happens is that they lease out space, collect rent on these buildings, and then pay dividends to the shareholders. Mortgage REITs finance real estate rather than owning it. The interest on their assets is how these REITs make money.

Bond Ladder

Bonds are the most common and popular income investing strategy. Many investors, especially the ones who are just creating their investment portfolio, prefer bonds because it's easier when it comes to managing risk. Although stocks have a higher risk than bonds, bonds are not risk-free.

With bonds, you are lending money to the company or government. The investment income from bonds is more limited, but it's easier to recover if the company you invested in goes into bankruptcy or a financial crisis.

There are many kinds of bonds that you can choose from depending on your risk tolerance and goals, such as government bonds or municipal bonds and corporate bonds. However, if you want a strategy that helps you gain the most possible, creating bond ladders is the way to go.

A bond ladder is a fixed-income portfolio with multiple bonds where each security has a different maturity date. This is done to lessen the interest rate risk.

How It Works

Bond laddering is simple and straightforward. There are multiple considerations to take when building bond ladders, such as spacing between maturities and types of securities.

With bond laddering, all you have to do is invest in multiple bonds that have differing maturities. As each bond reaches its maturity, you can reinvest your principal amount into new bonds, or you can reinvest at higher rates (only if the past performance moved higher).

With this strategy, even if rates fall, you still have other bond yields for the longer term.

Mutual Funds

For some investors, investing in the stock market and bond laddering to generate income can be a struggle. This is why many opt to look into mutual funds that are their own income investing strategy.

Depending on your investment objectives, there are both passively and actively managed funds that you can be part of. These bond funds invest in a basket of securities that provide interest income to investors.

How It Works

A mutual fund works by pooling money together from different investors. All the money pooled by these companies is used to buy stocks, bonds, and other assets.

Since all the money is invested into many companies, mutual funds offer instant income investing portfolio diversification to investors. Those who give money to the mutual fund share in the gains and losses.

Money Market Accounts

A money market account is like a mix of a checking and savings account where you get features from both types of accounts. It is usually confused with money market funds, but they are two different financial strategies or tools.

Unlike regular savings accounts, money market accounts offer higher interest rates. This is possible because money market accounts are allowed to invest in certificates of deposits and government securities, among others. However, how much interest you get tends to depend on the fluctuating conditions of the stock market.

Money market accounts allow people to have a stable income stream, but it may not always be the kind of investment income that can counter inflation.

How It Works

Money market accounts work like any other savings account. You simply open one, and you can already deposit your savings into it. However, when it comes to money market accounts, once you start depositing money into these accounts, you get to earn higher interest payments that are typically compounded daily and paid monthly.

Bottom Line

Regardless of what phase you are in life, investing for income will be a valuable step. If you're after growth investing, developing an income investing strategy can be a big help in guiding you and simplifying your financial goals. Investing doesn't have to be an intimidating and overwhelming activity as long as you let your chosen strategy guide you properly.

With these strategies, you can put your income investing portfolio on autopilot and watch your investment income grow. Remember that there are multiple ways to build wealth through investing, and not all the strategies might work for you.

If you're unsure what to do, a financial advisor can help you develop an investing strategy that follows your investing philosophy and goals.