The Motley Fool

What Is: Income Investing

Income investing 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 DAX Index.

The key is to ensure that the portfolio of shares is diversified. Consequently, income investors recommend picking a portfolio of 15 to 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, some of the shares might be taken over or need to be sold for other reasons, and new shares have to be selected to take their their place.

Income investors are mainly concerned with obtaining a rising income over time. As a result, some income investors claim that what happens to the investment principal 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 it’s not that big of a deal.

Other income investors see it somewhat differently. That’s because their goal is not just immediate income, but also future income. Consequently, capital performance is more important and the current income isn’t as critical.