Income Investing Guide: Strategies, Risks, and Benefits


Income investing is a strategy that enables you to produce positive, stable, recurring cash flow and generate income. You can typically do this by creating an investment portfolio with a mix of income-producing assets, such as dividend-paying stocks, bonds, and real estate. If you use this strategy, it’s important to ascertain how much income you want to produce and choose a portfolio to help you reach your goals.

Where do you dream about retiring someday? If you like to ski, imagine retiring to Vail, Colorado, living off the savings and investments you created with your retirement plan. Wouldn’t it be nice to get there sooner, before aging makes it harder to ski? With a passive income investing strategy, you can live the good life in Vail, even when you are still in your skiing prime. Here’s how to make it happen.

Income investing basics

When you invest, at least on the retail level, there are two ways to make money. One is to make money on the value or price of an asset going up through capital gains (going long) or betting that the asset will go down (going short). The other way is to make money via a recurring payment, such as a real estate/bond yield or a dividend. Sometimes you can have both — a great asset that will appreciate in value AND produce a steady amount of income. However, it’s best to identify and stick to a strategy when building a portfolio, so we will focus on an income investing strategy.

Pick your assets

With income investing, you are looking, first and foremost, for assets that will produce cash on a recurring basis. Different people will have different strategies. For example, Shaun Martin, a real estate investor who has been investing in income-producing assets for quite some time, suggests the following.

“Some fundamental choices for an income investing strategy include bonds and dividend stocks, real estate investment trusts (REITs), peer-to-peer lending, master limited partnerships (MLPs), and annuities,” he says. “Each of these options provides the potential for income and varying levels of risk. It is important to carefully research each option in order to make the best decision for your individual situation. Additionally, it is always recommended that investors consult a financial advisor before making any investment decisions.”

Examples of income-producing assets

Here are some of the most common assets one should consider while developing a portfolio with an income investing strategy.

Real estate

Real estate properties can be rented out either residentially or commercially for short-term or long-term leases. This includes land such as farmland or land that has mineral rights.

Yielding bonds

These include government, corporate, and municipal bonds that yield either fixed or floating returns on a recurring basis.

Stocks/ETFs/REITs/mutual funds paying dividends

Stocks, ETFs, REITs, and mutual funds can make dividend payments and interest payments. If you have invested in the stock market before, you might already be familiar with this concept.

Money market accounts/savings accounts

Savings accounts and money market accounts/funds are bank products that pay a recurring income.


Annuities are financial products for which you pay a lump sum, with an agreement that you will be paid a certain amount at retirement age. These are meant for your retirement years and not for people looking to produce income beforehand.

Investing, issuing debt, or buying businesses

Investing in a business, i.e., loaning money/private equity, can produce a yield and income via positive cash flow in the business. In fact, if you can access debt via the private markets, you can get some of the best yields around, according to Ben Fraser, the chief investment officer of Aspen Funds. “The best place to go find income is in the private markets and private equity — generally, getting on the debt side of the capital stack,” he says. “One of our note funds, our income fund, serves this exact purpose and produces a nice income by buying debt on residential property in the private markets.”


Although not for your usual retail mom-and-pop investor, investing in the rights to music or television shows and taking royalties can produce income for years (see TV syndication deals).

Each of these assets can produce income, and each person’s asset selection will depend on their own personal needs and wants.

Fixed income vs. non-fixed income investing

Some financial products pay a fixed yield and some pay a yield that floats and is based on other metrics, such as the Fed’s base rate or the performance of the asset. In most cases, a fixed-yield income investment strategy will mix both the preservation of capital and yield. Therefore, fixed-income products and investments will generally produce a lower yield than non-fixed ones. This is the classic theory of more risk = more upside and more downside, whereas low risk offers less upside and less downside.

Building a portfolio: Mr. Wang wants to stop working

To give you an example of what it would look like to build a portfolio, we will take Mr. Wang, a 40-year-old permanent U.S. resident who grew up in China. Mr. Wang just inherited $200,000. His plan is to go back to China and stop working while he ponders his next steps. If he goes back to his native province of Yunnan, where the cost is low, he can live off his assets producing income in the U.S.

To live the “good life,” he needs to make about $2,000 a month or $24,000 per year, and he won’t have to work. So with just $200,000, here is the income yield he needs to produce and how much he can add to it to bring the yield within reasonable parameters.

Capital Money Needed Yield
$200,000 $24,000 12%
$300,000 $24,000 8%
$400,000 $24,000 6%
$500,000 $24,000 4.8%
$600,000 $24,000 4%

So, if Mr. Wang wants to live on $24,000 a year from $200,000, he would need to make a 12% aggregate yield on his income-producing assets. Assuming he wants a diversification of risk, this might be difficult to execute. He decides that $400,000 is much more reasonable as he only needs to produce an average 6% yield to make the $24,000. So now Mr. Wang has a goal: to save an extra $200,000 in the next few years, which he thinks he can do in three years. Here is how he chooses to structure his portfolio, with $400,000 to produce an income of $24,000, or 6%.

1. $105,000 into real estate with a mortgage

Mr. Wang wants at least a quarter of his portfolio in real estate. Although higher risk than a bond, real estate offers a high upside when it comes to rental income, as long as the rental numbers make sense. There are not too many properties for $100,000, so he finds a place with awesome rental returns for $350,000 and uses a mortgage. Let’s break it down below.

Property price $350,000
Deposit $105,000
Mortgage $245,000
Yearly net rental income $24,000
Yield produced 0
Debt servicing -$15,000
Net income after debt $9,000
Net yield 2.57%
Cash on cash yield 8.57%

You can see that Mr. Wang receives an income of $24,000 on his net rental income, which is the rental income after HOAs, property tax, etc. After he services his debt, he nets about $9,000. Not so much when looking at the rental compared to the price of the property. But if you look at the return on the $105,000 he invested, he is producing a yearly return of 8.59% on his money.

Risk Type: Medium

The risks for Mr. Wang with his property are:

  • He cannot get the rental he wants
  • His mortgage payments could increase if he has an adjustable-rate mortgage linked to Fed rates.

However, these can both be upsides as well. If interest rates go down with a floating ARM, then Mr. Wang will pocket more money. If he can earn more rent, he will also pocket more money. If the property price goes up, that can also give him other options. For now, we will stick to the income-producing aspect of the property for our forecasting.

2. $75,000 in treasury bonds

U.S. Treasury bonds are one of the safest places to put your money, whether you are an individual investor or the Saudi Arabian Sovereign Wealth Fund. Mr. Wang wants the same security as the Saudi Arabian Sovereign Wealth Fund enjoys, so he trades yield for security and sticks $75,000 in a 20-year U.S. Treasury bond at 4%.

Treasury Bonds Capital Annual Yield Annual Income
Total income produced $75,000 4% $3,000

Risk Type: Super low

There are zero risks unless Mr. Wang needs to sell his bonds at some point. In this case, the value of his bonds could go down if interest rates continue to rise and new bonds with a higher interest rate/yield are issued. However, if he wants to preserve capital and wait the whole 20 years, it’s essentially risk-free.

Treasury bonds are guaranteed; that’s why when interest rates go up, all the capital in the world flocks to the U.S. No matter what happens, Mr. Wang preserves his capital with treasury bonds if he sticks with the full term of the bond.

3. $100,000 in blue-chip bond funds (ETFs)

Mr. Wang wants more exposure to the bond market but wants to do it through fund platforms rather than buying them himself. He sees the Nuveen Municipal Bond Fund and the Vanguard Short Term Index Fund are returning about 5% on average yearly. He sees that yield as pretty stable and lower risk, so he throws $100,000 into the above bond funds.

Bonds Capital Annual Yield Annual Income
Nuveen Municipal Fund $60,000 5% $3,000
Vanguard Bond Fund $60,000 5% $3,000
Total income produced $120,000 5% $6,000

Risk Type: Low risk

As Mr. Wang is holding a bond ETF instead of individual bonds, then he runs a very minimal risk of companies defaulting on the bond yields they owe him. The ETF’s job is to replace and monitor existing bond assets in the portfolio constantly. In many cases, these ETFs will probably follow a bond index (index-traded ETFs).

Therefore, the risks in a bond ETF are as follows:

  • As the bonds are not held directly, it’s possible that the investor cannot get their principal back. It is not guaranteed with a fixed repayment as you would get with an actual bond.
  • The bond values can actually go down in a high-interest-rate environment because new bonds might be issued with higher interest rates, driving down the value of the previous bond mix.

Mr. Wang figures that as he invests in blue-chip bond funds, they should hold their value more or less, and he can rely on that yield/income of 5%.

4. $120,000 in high-risk, high-yielding alternative assets

Mr. Wang now decides he wants to allocate the additional $120,000 on alternative assets. This is not something a financial advisor would probably recommend, but the assets could produce high yields if everything works out. He chooses two high-yielding alternative income-producing assets.

Mr. Wang chooses a cryptocurrency P2P yielding product and a palm oil plantation investment. Crypto P2P trading means that you lend crypto out to the palm oil plantation investment product as a sort of security, although it’s not SEC-regulated. You invest in a palm oil plantation in another country and receive an income. This is also high and yields about 10%.

Alternative Assets Capital Annual Yield Annual Income
Crypto P2P yielding asset $60,000 10% $6,000
Indonesian palm trees $60,000 10% $6,000
Total income produced $120,000 10% $12,000

Risk Type: High risk

This is high risk, so Mr. Wang must be wary of the following risks:

  • He could lose all of his capital
  • The investment could not perform as well, as the yields weren’t fixed

The biggest risk is that Mr. Wang loses all of his capital, but the returns not being up to snuff can also be an issue. However, Mr. Wang is willing to take this risk, as he feels he has properly weighted his portfolio risk-wise and is willing to risk more for a higher yield.

Mr. Wang’s total portfolio

Mr. Wang’s $400,000 portfolio forecast now yields 6.89%, and it produces $29,000 a year, well within his budget for living back in Yunnan province. He has given himself a bit of leeway with the extra $5,000, on top of the $24,000 he needs to live.


Asset Money Invested Annual Yield Annual Income Risk Profile
Real estate $105,000 8.57% $9,000 Medium
Treasuries $75,000 4% $3,000 Super low
Bond ETF $100,000 5% $5,000 Low
Alternative assets $120,000 10% $12,000 High
Total money invested $400,000 6.89% $29,000

Ready to build your own portfolio? These investment advisors can help.


What is income investing, and how does it differ from other investment strategies?

Income investing means building an investment strategy to produce stable and recurring income. Income investors will have different strategies for what they hold, but they need to produce a certain amount of income. Other strategies are more focused on selling assets in a lump sum (flipping a house) or saving for retirement.

What are some common income-generating investments, and how do they work?

In addition to traditional investments like stocks, bonds, and ETFs, renting out real estate to a tenant, either short-term (Airbnb) or long-term, will produce income. Investing in a business by purchasing equity or debt is another income-generating method.

Key takeaways

  • Income investing is a strategy of, first and foremost, being able to produce positive, stable, recurring cash flow or income.
  • You can calculate the amount of money you need to make in returns to replace your income each year, with the goal of earning that amount.
  • Real estate, money market mutual funds, and fixed-income securities like treasury bonds, ETFs, and stocks that pay dividends are all assets that can be held in an income investment portfolio.
  • Regardless of general risk tolerance, a portfolio should have a mix of assets with different risk levels. A more conservative investor might go for a more conservative mix.
  • Interest-rate risk is real, and one should consider it, along with other risks, when building an income-investing portfolio.
View Article Sources
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