There are two ways for retirees to live off their investments. One is to sell stocks or assets when you need cash, but this will leave you very susceptible to the vagaries of the market. You’ll sometimes have to sell assets at disadvantageous prices, just because you need the money.
That’s why many retired investors focus instead on investing for income: owning investments that generate a steady income stream, without ever having to sell anything.
There are several advantages to income investing. For one, your income stream is reliable, and not price-dependent. The best income-generating investments keep paying investors to own them regardless of what’s happening to their price.
Second, if you invest right, your income stream can actually grow… sometimes while your portfolio is growing too! If you’re selling assets whenever you need cash, your portfolio will be shrinking over time. But if you own investments with growing income streams, and rising prices, your income and your portfolio value can both increase over time.
Income investing can also become less work as you get older. After a few years of building up your income portfolio, you may find that you can just sit back and watch the dividend checks roll in as you enjoy your golden years.
Lastly, income investments’ reliable returns make them less volatile than the market. A recent study found that U.S. stock funds with yields over 2% (meaning they hold mostly dividend-paying stocks) had an average three-year annualized standard deviation (a measure of volatility) of three percentage points less than stock funds yielding less than 2%. In addition, many income investments actually become more popular when the market is weak—or when the environment is “risk-off” in Street parlance—so they can be great buy-and-hold assets for investors who don’t want to have to trade a lot.
Income investing is fundamentally different from investing for capital appreciation though. If you’re accustomed to buying stocks for their appreciation potential and selling after their prices rise, then you may have to start thinking differently about your investing strategy.
You’ll be buying investments for different reasons, and likely holding for different time periods, and then selling for different reasons (or not selling at all).
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