Why Income Investing?
Income investing especially through bonds should be part of a prudent financial planning, matching your risk tolerance and time horizon. It is different from growth investing such as buying equities. Income investing provides a steady stream of income to cover living expenses without having to sell assets. For example, you are not forced to sell stocks or real estates at a loss during a market downturn to raise cash.
1) Capital Preservation and Reduced Volatility
Bonds, especially government and high-quality corporate bonds can provide stability in your portfolio as they are less volatile than equities. By purchasing bonds that mature when the future expenses are due, you can guarantee the funds will be there regardless of market conditions. As long as the issuer does not default, and if held to maturity, a bond promises to return the principal. Equities, however, provides no such promise. This allows for a precise financial planning.
Please refer to below table for the different types of investments.
2) Predictability of a return
Bonds generate reliable cash flows by paying regular, scheduled interest or coupons. The predictability is one of the invaluable features of a bond especially for investors who cannot afford to take large, sudden drop in the portfolio value.
3) Portfolio diversification
Bonds often have low or negative correlation to equities. When the stocks go down, bonds often go up or stay flat. This diversification effect can smooth out the portfolio return and reduce risk. During a stock market crash or an economic recession, investors often look for the safety of bonds (“Flight to Quality”), which keeps or even appreciates in value during an economic downturn. This can reduce portfolio losses.
Income investing is broader than just bonds – dividend-paying stocks, real estate investment trusts (REITs), which pay dividends from real estate income and preferred stocks – can all be part of income investing.
Income investing is important because it shifts focus from speculative growth generally through stock investment to contractual cash flow – a predictable income an asset can generate. It can serve as a stable foundation of a portfolio, providing safety, predictability and reliable cash flows that can enable investors to take calculated risk. For investors with specific financial goals, it is essential to have wealth preservation and wealth management plan through income investing.