Income investing, as the name suggests, is a strategy that is designed to let investors derive income from their portfolio. What’s more, the investor should achieve this without having to touch the capital through selling shares.
The idea is that an investor buys a portfolio of shares where the total dividend received should ideally rise above the rate of inflation. In other words, the rising dividends should protect the purchasing power of the income stream.
A secondary aim, but nonetheless as important, is for the capital performance of the shares to outperform the market, as measured by an index such as, say, the Straits Times Index.
The key is to ensure that the portfolio of shares is diversified. Consequently, income investors recommend picking a portfolio of 15-20 high-yield shares from a wide variety of different industries. The intention is to hold each share forever. In practice though, as the years go by, a number of shares might be taken over and new shares have to be selected to take their their place.
Income investors are concerned with obtaining a rising income over time, probably the rest of their life and preferably, of course, in real terms too. Some claim that what happens to the capital is very much secondary. So, assuming the income does the business, then it would be nice if the capital beats the market long term, but if it doesn’t quite do that, then their attitude is one of, well so what?
Other income savers see it somewhat differently. That’s because their goal is not immediate but future income. Consequently capital performance may appear very important and the current income, many years prior to drawing it, relatively unimportant.
Click here now for your FREE subscription to Take Stock Singapore, The Motley Fool’s free investing newsletter. Written by David Kuo, Take Stock Singapore tells you exactly what’s happening in today’s markets, and shows how you can GROW your wealth in the years ahead.
Like us on Facebook to keep up-to-date with our latest news and articles. The Motley Fool’s purpose is to help the world invest, better.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.