The Real Story about “Income Investing”



  1. Most investors don’t understand the fundamental concepts of Income Investing vs Growth Investing.
  2. Income Investing is specifically designed to help fill the “gap” between guaranteed retirement income and actual spending needs.
  3. Income should come from dividends or interest.
  4. Income Investors do not selling shares, only as a last resort.
  5. High yield instruments should account for income and inflation.
  6. Dividends from Income Investing should cover all RMD requirements.
  7. Stock price growth of the stocks, although nice, is not the main goal of the portfolio.
  8. Income Investors don’t need to check their stock prices every day.

Few investors seem to really understand the concept of “Income Investing” until retirements is upon them and they find the need to fill the income gap between their living expenses and their Social Security and pension payments. They need to generate income from dividends or interest (Bonds).

If a retiree needs income they have two basic choices, see shares or accumulate dividends. An Income Investor does not sell shares for income, other than in some emergency situation. Of course any investor, including an Income Investor will sell share if the stock or fund is no longer meeting the investors requirements or as part of a re-balancing. For example a growth investor may have 100 shares of Facebook, if this investor needs cash the investor must sell a few share of Facebook, thus lowering the core portfolio. By comparison an Income Investor would not hold Facebook, since it pays no dividend. This investor might hold AT&T (ticker T) and it generates around 5% dividends.

A retiree may have multiple accounts, a taxable growth account, an IRA income account and even a ROTH IRA. The taxable account might be set aside primarily for growth, maybe building wealth for future generations of the family. The IRA as an income account is an idea place where you might have a well-diversified group of higher yielding dividend stocks. In this case an idea situation would be to earn enough in dividends to cover all cash requirements, inflation and the RMD (Required Minimum Distribution) beginning at age 70.

I’m both an Income and a Growth investor at the same time.

The investor should construct the Income Account well before needing actual cash withdrawals for retirement. A few years or experience with different investments in the Income Account will provide a valuable education. How diversified should my investments be, what is my average yield goal. You can almost work backwards from the portfolio value. For example, I need $25,000 a year in steady cash flow and my average yields is designed to be 5%, then I need to have $500,000 in my IRA.

Let’s take a little better look at this sample $500,000 portfolio. At age 70 the 1st year RMD would be about $18,250, in year 7 the RMD would climb to about $25,242, this assumes 5% dividend yield and a 1% growth in underlying stock prices (6% total return).

If you needed to generate a guaranteed 5% yield and have diversification you might want to target even 6% to cover the normal ups and downs in dividend adjustments. This portfolio cannot just include blue-chip, large cap stocks, most don’t come close to a 6% yield. You will need to go up the risk curve a little and add items like:

  • Preferred Stocks 
  • CEF’s – closed end funds 
  • REITS – real estate investment trusts
  • BDC’s – business development companies
  • MLP – Master Limited Partnerships
  • Telecom Stocks
  • Tobacco Stocks 

Below is a chart showing my Income Account that will more than fill my “gap” and RMD requirements. With my Social Security, pensions and this Income Account we can live a comfortable life style without needing to touch our Growth taxable brokerage account.

This portfolio yields about 7.45% based on my costs. I have 29 stocks, ETF or funds in this portfolio. I tend to like Preferred’s most of which are banks, followed by REIT’s and Closed End Funds.

If you are nearing retirement age or are retired you too should consider building an Income Investing strategy to fill your gap.



Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s