Friday, February 4, 2011

Definition of an income investor.

Who is an income investor? Are you an income investor? Should you become an income investor?

An income investor is one who uses some or all of their investments to create income in the form of dividends, interest, and capital gains.

Two groups of investors consider income first.

If you need to spend the income from your investments to live on, you are an income investor. You should read the ideas presented in this website and follow my blog to learn how to maximize your investment income. You would be very surprised to learn how many investors who need income to live on do not invest in income instruments. For instance, I asked a client to describe his investment criteria. He responded that he was a conservative investor who wanted income. Then he suggested we buy Google (GOOG.) Google may be a great company but it does not pay out income.

Most investors who need to create income to live on are retired or disabled. Yet another group of income investors exists. These are working people who are laying the seeds for future income. A working person who has saved money to invest would be wise to consider characterizing their investment goals as needing to create income.

Here is how it works for younger, working people. When you buy into a company that pays a dividend and you reinvest the dividend income in that same company over time, you effectively dollar cost average your investment. You compound the growth of your investment and in a few years when you want to create income to live on, you simply turn on the income spigot from that company.

Of course, you have to pick your companies carefully and you have to be patient.

For younger investors who want to see their investment dollars grow, an income strategy also is effective. If you have a 3% dividend and the stock price stays the same, you will double your investment in about 22 years. If you receive a 7% return in the combination of dividend and stock price increase, you double your money in 10 years. Moreover, if you are astute enough to receive a 10% compound return in the form of dividends, stock price increase and covered call income, your investment doubles in 7 years.

Older investors who do not spend all their investment income; who save some of those investments for the future, knowing they will have to increase income to keep up with expenses, can use the income reinvestment miracle to grow their investments.

Think about the definition of an income investor. Contemplate a move in that direction and take the money to the bank. Remember buy stock in or lend your money to a company that makes money, shares that money with you in the form of a dividend, increases that dividend periodically, and has a strong balance sheet. IF you lend your money to a government, make sure they are highly likely to pay you back.



Very Truly Yours,

TheMoneyMadam