Investment Income for Now, and Later: Where it Fits in Your Portfolio

Most of us are familiar with the “buy low, sell high” approach to investing. While we can’t argue with the reasoning, this old adage tends to oversimplify the role that capital appreciation can, and should, play in driving investment decisions. Sure, capital gain is an important element of total return, but it’s not the only way to make money from an investment.

Income investing is a strategy that focuses on generating a steady stream of income, typically through dividends, interest payments and other yield-producing assets, rather than relying solely on capital appreciation. This approach can be especially valuable for individuals seeking financial stability, retirees who need regular income, or investors who want to diversify their portfolios. Understanding the importance of income investing involves examining the benefits it offers in terms of cash flow, risk management and long-term financial goals.

Predictable Cash Flow

One of the primary reasons income investing is so important is that it provides a predictable and consistent cash flow. Unlike growth investing, which depends on the appreciation of the value of an asset, income investing delivers regular income through dividends, bond yields, or rental income. This can be particularly valuable for retirees who no longer have a steady paycheck and need to replace it with a reliable source of income. Similarly, for investors looking to fund specific goals like education, home purchases, or healthcare expenses, income investments can help smooth out cash flow needs over time.

Diversification Benefits*

Income investments also play a crucial role in portfolio diversification. By incorporating income-producing assets like dividend stocks, bonds, or real estate into a portfolio, investors can balance the risk of growth stocks, which are often more volatile. A diversified portfolio that includes both income and growth investments can offer the best of both worlds — capital appreciation potential coupled with steady income generation.

Why Now?

Years of near-zero interest rates helped create an extended “low-yield” era, where it was difficult for investors to find assets that offered strong, reliable income streams. This era began to wane when the Fed embarked on a series of rate hikes. Interest rates went up, along with yields on fixed income investments. Finally, yield-seekers had a reason to celebrate. Fast forward to now: rates are coming down, but demand for investment income remains high, with investors continuing to seek investments with high income potential.

Some of this may be due to an influx of boomers entering retirement, but even among pre-retirees, people are seeing the benefits of holding assets that give back in the form of a regular cash payment that can then be reinvested. When talking to our clients about the role of income in their portfolios, we emphasize a flexible, diversified approach that can be tailored to meet a family’s unique needs at a given point in time. For example, younger investors with a longer-time horizon might opt for more volatile high-yield asset classes, while older individuals tend to de-risk their portfolios with age. Balancing the need for income versus the need for capital appreciation is a mathematical calculation that is different for every individual based on their investment objectives and risk profile. It is important to work with a qualified financial advisor or wealth manager to define those objectives.

Final Word

Income investing offers numerous advantages that can help meet a variety of financial goals. From providing a more predictable cash flow and stability in volatile markets to offering compounding opportunities and reducing overall portfolio risk, it’s a strategy that can benefit a wide range of investors. Whether you are saving for retirement, seeking regular income in your golden years, or looking to add stability and diversification to your investment mix, income investing plays a vital role in building a financially secure future.

Robert Burts, Jr. is Senior Vice President of Investments at Synovus Securities, Inc.

*Diversification does not ensure against loss.