It’s a scary time to be an investor. The Trump White House team has yet to hit its stride eight months after Inauguration Day. And policy? Many observers are worried that the Trump pro-growth agenda is in jeopardy and wonder if we’ll ever see President Trump’s promised tax reform. News reports are posted by the hour on North Korea and intercontinental ballistic missiles, coupled with Kim Jong Un’s alleged support from China’s leader, Xi Jinping. There have been horrifying terror attacks in Finland and Spain.
Meanwhile, stateside, stocks are at all time highs. What’s an investor to do to weather the storm of alarming news both from home and abroad? I’m glad you asked. The answer is to stay strategic. The next question is, “How?”
Everyone is looking for a strategy that makes him or her feel confident about investing in the future. This is especially true for times like these when folks are on needles and pins.
My answer is income investing.
I’m such a believer in this approach that it is a focus of my book, You Can Retire Sooner Than You Think. I have used my income investing philosophy to help numerous clients reach successful retirements. Now let me share this strategy with you.
At its core, income investing is aimed at generating cash flow from your investment holdings – from things like stock dividends, bond interest, et cetera. This money is then reinvested to quicken the growth of your portfolio until you retire. At that point, this income is redirected to provide you with a “paycheck” to fund your spending needs.
How Income Investing Is Different
Income investing differs from pure growth investing. The latter is based on buying shares of companies that are focusing all of their resources, including profits, on expansion and domination. Key examples here are Alphabet (the parent company of Google) and Amazon. With pure growth investing, you reap your rewards when you sell these stocks after they have (hopefully) appreciated for 10, 20, or 30 years.
Income investing approaches things from a different angle. To a large extent, it allows for more diversification; generates steady, predictable income over the years; and still allows you access to the growth sector.
How To Implement Income Investing
Some of the many ways to implement an income investing strategy can seem dauntingly complex. But I’ve come up with a system that I believe is easy to understand and even easier to implement. I call it the “Bucket System,” because all the money you invest will fall into one of four “buckets,” or asset groups, that work together to advance you towards your investment goals. Let’s delve into this system.
Growth Bucket – Here’s where you capture the “capital appreciation” benefits of owning stock in fast-growing companies, like Amazon, which provide no current dividend income. But, as an income investor, you’ll want the majority of the stocks in your growth bucket to also pay a dividend. This type of stock is often found in one of four categories – healthcare, utilities, telecommunications, and consumer staples. Some established tech companies (like Microsoft) and energy outfits (like Southern Company) also provide both growth and income. These stocks often have yields in the 2% – 5% range.
Income Bucket – This part of your portfolio is invested in various types of bonds – like Treasury, municipal, corporate, high-yield, international and floating rate. Bonds types range from very safe (Treasury) to very risky (high yield), and yields vary accordingly. For this reason, you’ll want to maintain a balance of bond types to simultaneously maximize returns and protect your principal. Depending on your particular blend, the annual yield for this bucket should be in the 1% – 6% range.
Alternative Bucket – This bucket contains any asset that isn’t a traditional stock or bond. Some examples are real estate investment trusts (REITs), master limited partnerships (MLPs), preferred stocks, and closed-end funds. In your alternative bucket, you are seeking higher current income than stocks and bonds. But, this endeavor does come with higher levels of risk. I consider this bucket to be your overall portfolio yield-enhancer, as yields from these alternative investments can range from 3% to 8% annually.
Cash Bucket – Don’t forget about your emergency fund. You know, the money that lets you sleep well at night. Ideally, you should have about six months of living expenses stashed in money markets, CDs or savings. This one is all about safety. Your yield on this bucket will hover around 1%.
Remember, when I refer to “annual yield” for each bucket, I’m talking about the amount of cash flow that you will receive from the group of assets in that particular bucket. Your total return will, of course, be impacted by price fluctuations of the underlying assets in the bucket.
One timely thing to consider as you fill your income and growth buckets is the impact the Trump agenda may have on certain market sectors. While the media (and the market, to some extent) have consigned Trump’s agenda to the scrapheap of history, I’m not so sure about that. The President’s plans to upgrade our public infrastructure, bolster the military, and, most importantly, overhaul the tax code could have an enormous impact in certain sectors – like defense, construction, and financial services – and create thousands of jobs along the way. And in the coming weeks, look for a Trump PR tsunami, as advocates of Trump’s tax reform proposal begin to sell this policy to the public and Congress.
So, income investing boils down to creating buckets for your investments and spreading your money across income-driven vehicles. Easy enough, right? Of course, once you have your buckets in place, you need to keep regular tabs on their performance, making adjustments as needed in response to changes in your life or financial goals.