Solid Income Investments Must Meet These Criteria

There are no doubts that the economy has been in a state of flux and this uncertainty has shaken many investors to the core (just like the last one…some people never learn). While the large trading houses and institutions are again making record profits, small individual investors with their 401k plans, IRA’s, and the like aren’t benefiting like they should be, probably due mostly to inopportune investment decisions.  In any event, the recent turmoil has made income investing popular again, which means income investments are again all the rage (a hand in the bush is worth 3 birds in the freezer, or something like that).

There are four basic criteria all income producing investments should meet to some degree before even thinking of investing.  Yes, that may mean exotic investments such as cash flow notes are off-limits, but better safe than sorry. These criteria are diversified holdings, reasonably high income generation ability, potential for at least some income growth, and liquidity.

Diversified Holdings

The idea of diversification may seem cliché but, through proper diversification, an investor can secure their income and properly manage their risk. If you get nothing else out of this post, know this:  high income investments often sport such attractive yields because there is inherent risk in owning them.  Ample diversification will help mitigate this risk somewhat.  For example, you wouldn’t dream of investing a large portion of your portfolio in a single high-yield bond, would you?  Instead, you’d probably choose a high yield bond fund.

High Income

These income generating investments should consist of dividends and interest payments that are steady and reliable. Stocks that do not pay reliable dividends are not among the best income investments. By contrast, dividend mutual funds, municipal bond funds, and real estate investment trusts (REITs) typically make very good income investments.  This is the base revenue stream and these investments should be spread through high interest CDs, high dividend stocks (such as utilities), and a variety of other fixed income investments (bonds, savings accounts, etc).

Potential For Income Growth

A good income investment would ideally have at least some potential for income growth.  Not that there’s anything wrong with a fixed income investment;  far from it, it’s just that by definition, fixed income investments carry no inflation protection (putting aside TIPS for now).    Thus, the fixed income portion of any income portfolio must contain at least some amount of more riskier assets, such as stocks, whose dividends tend to grow apace of inflation.

Liquid

Unless you are richer than Donald Trump, an illiquid investment is generally not a good investment.  In an emergency, you can always sell off liquid investments to raise capital.  If your assets are illiquid, however, you may be forced to take out a loan or, worse, sell out at a ridiculously low price at exactly the wrong moment. This can all be avoided by keeping easily liquidated assets on hand. These include anything traded on a regulated exchange, mutual funds, and most residential real estate.

By creating an income investment plan that involves consistent payouts, investors can add to their monthly income or even keep building more investments for retirement. Investors can alter the investment strategies to meet changing lifestyles and goals. With planning and vigilance, an investor can keep their investments safe for years to come.