When people think of Investing for Income, the first thing that might come to mind is investing in non-stock market investments, like bonds. Yes, bonds and bond-like instruments are an important part of investing for income, but there is also a way for those with the willingness and ability to endure some level of stock market risk to enjoy the benefits of earning a steady income through dividends. That’s exactly what we are going to talk about in this report — investing for income in the stock market.
Keep in mind that stocks are generally considered to be riskier than bonds because they can drop in value, and because dividends can be cut or reduced. Some financial firms might tell you that they have some proprietary formula or advanced algorithm to manage stocks and help protect your investments from downside risk. Well, these algorithms don’t work forever, and eventually, they fail to protect the investor.
However, a dividend-paying value stock strategy can help to mitigate stock market risk. One reason is that you are buying “undervalued” stocks, which means they should have somewhat less downside risk than an “overvalued” stock. Another reason is that your dividend payment is a “bird in the hand.”
The Real Estate Analogy
To illustrate the benefits of a “bird in the hand” strategy, let’s consider two different couples who decide to invest in real estate. The first couple decides to invest in a plot of land — hoping that the value of their land will appreciate by the time they retire so they can sell it for a profit. Then, just as they’re about to retire, the real estate market experiences a downturn and the value of their land drops significantly. This couple would most likely feel the pain of this drop in value.
Now, consider the second couple, who decide to invest in a rental property instead. Each month this couple can collect rent from their tenant. Because of the steady income coming in, this couple wouldn’t be so concerned about a potential drop in value. The steady income they receive would help to soften the blow of a drop in property values. If they had no intention of selling their property anytime soon, it might not even impact their ability to fund their retirement.
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