Simple Principles for Successful Income Investing
Mountain climbing, like investing, inherently involves risk. Packing a survival blanket to withstand hypothermia, and a second pair of goggles to prevent the blindness of frozen eyelids, and establishing multiple camps on big mountain adventures, to which you may flee and recover from injury, all offer the dividend of living to climb another day. The financial benefits associative to income investing, or owning investments which pay a present stream of income (‘Income’), as opposed to none, are commensurate with such critical climbing principles, and include:
‘Income’ provides a margin of risk reduction with your investment. ‘Income’ paid today replaces a pure reliance on growth, which is often speculative and risky.
‘Income’ accelerates the compounding of investment returns (over reinvesting capital gains alone) and increases share ownership.
It is our opinion ‘income’ fights inflation more effectively than growth because inflation places a premium on ‘income’, and discounts its absence.
‘Income’ can give you a raise without depleting the principle of your investment, even when growth is elusive.
A portfolio containing ‘income’ investments likely equates to less overall risk and higher average portfolio quality, and it is our opinion only established, competitive companies can meet the promise of a consistent dividend through periods of recession and bear markets.
‘Income’ investments simplify the investment process and potentially decrease portfolio expenses because the average hold time far exceeds that of non-‘income’ investments.
Doc Eifrig, a successful and well-known ‘income’-focused investor at Stansberry Research, suggests we are in a ripe period for ‘income’ investing today, following the Fed’s aggressive rate hike campaign in 2022, and lays out three simple principles for successful ‘income’ investing:
Buying dividend stocks alone isn’t enough. To consistently maximize both income and returns, investors must a) utilize bonds, REIT’s, MLP’s, ETF’s, annuities, and Treasury bonds, b) understand the environment in which each ‘income’ investment thrives, and c) act at the appropriate time. It won’t help a climber who responds to frozen hands by putting their helmet on!
Always be a value investor when purchasing ‘income’ investments. Have strict ‘buy’ parameters, and stick to them like a tick on a dog. Never overpay for an ‘income’ investment. Never chase prices.
Never accept less interest on cash savings than the market will safely give you, even on your emergency fund, especially in a high inflation environment.¹
An elite winter climbing day above tree-line, and ‘income’ investing in today’s pristine rate environment both come with three charges; the former: pack carefully, fuel up, and enjoy the adventure!; the latter: recognize the benefits, apply the means, and enjoy the financial blessing.
Think about it, Shaun.
“Our favorite holding period is forever”. ~Warren Buffet
“Price is what you pay. Value is what you get”. ~Warren Buffet
“Never depend on a single income. Make an investment to create a second source”. ~Warren Buffet
“Wealth gained hastily will dwindle, but whoever gathers little by little will increase it.” ~Proverbs 13:11
1 Stansberry Research, Daily Wealth, “We’re in a Rare Age for Income Investors”, by Dr. David Eifrig, April 12, 2023
The opinions voiced in this material are general, are not intended to provide specific recommendations, and do not necessarily reflect the views of LPL Financial.
All investing involves risk including the possible loss of principle. No strategy ensures success or protects against loss. Dividend payments are not guaranteed and may be reduced or eliminated at any time by the company.
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