Why I Invest for Income

For one thing, I get multiple paydays every month

Photo credit: Kaboompics.com

Last week I went to a free live workshop from a well-known personal finance guru, focused on teaching women how to invest. Most of the information conveyed for beginners was good—basic and accurate. But as with so many free workshops, it was really a marketing event to encourage attendees to sign up for a more expensive course and membership group costing just under $500/year, using a proprietary technology platform to invest. I had mixed feelings as I listened to the sales pitch, couched in the language of empowering women. At the same time, the guru pooh-poohed DIY platforms like Fidelity and Schwab as too confusing for most people to use. They didn’t mention Certified Financial Planners or fiduciary investment advisors for those who want professional advice that doesn’t involve a sales commission.

Yes, I think women need to take control of their financial future, and investing is an essential piece of that. A taxable investment account is an asset that can be used as a source of additional income before and after you stop working, and can help with tax management. No one can simply save their way to retirement. Especially women, thanks to the gender wage gap. And if it gets you started investing sooner instead of later, a $500 course is inexpensive compared to the opportunity cost of not investing. Investing in index funds is relatively easy, and again, it’s better than not investing at all.

While there is always some level of risk with investing, period, one of the reasons index funds come so highly recommended is that by buying the index, you’re getting a little of everything, thus reducing the risk of losing money due to putting all your investment dollars into a single individual stock. But who puts all their money into a single stock? No one.

Most DIY investors build their own basket of stocks, or portfolio. Each stock serves a purpose. Some may be for growth, some for income, some for hedging against a market downturn. The goal is for the portfolio as a whole to gain in value over a long period of time, not hit the jackpot on every individual holding within a few weeks. And different types of taxable, tax-deferred, and tax-free accounts can help manage your tax liability, before and after retirement.

It is absolutely possible to learn to invest for yourself, using one of the major DIY platforms. Yes, they do take some time to learn your way around because they have a lot of free research and resources available. There are also a ton of free resources (Investopedia, for example) where you can learn through doing by trading on paper, without risking real cash until you feel more comfortable. The bottom line for me is that no one is going to care more about my money than I do, and that’s a big reason why I like doing it myself.

My goal for investing is to replace as large a portion as possible of my previous paycheck without a stupid amount of risk. So, I focus on the income each stock in my portfolio generates, along with the potential for capital gains. In particular, I look for dividend stocks with an established track record that yield roughly 3% to 5%, or a little better than what I could earn from a high yield savings account or short term CD. I also like to see companies with a low amount of debt, solid free cash flow (the company makes money) and a business model that makes sense to me. I also invest in real estate investment trusts (REITs), closed end funds (CEFs), as well as business development companies (BDCs), all of which tend to have a higher yield in the 6% to 10%+ range. The tradeoff there is that I’m not getting a lot of price appreciation on the high yielders. But I don’t need to sell shares to generate income. It’s kinda like having my cake and eating it too.

I started investing in 2008, and have written about that experience in another post. I started with putting $50 a month into a taxable account. Seventeen years later, the portfolio as a whole is generating about 43% of my previous income. My yield on cost of money invested is 10% and the portfolio is less volatile (beta is .82) than the market as a whole. Between dividends and Social Security, once my spouse and I both stop working we’ll have about the same monthly income than we do now. Plus the value of the actual shares we currently own, should we ever want or need to sell them.

I still have the taxable account, which has grown quite a bit, plus a traditional IRA account rolled over from a previous 401(k), and two Roth accounts. The taxable and IRA accounts are generating enough income that I can selectively reinvest some of dividends, add about $1,000 to the checking account for bills every month, and put the rest into savings. Any new money is going into the Roth accounts. We’re on track to max these out for 2025, and my husband and I plan to keep working (fingers crossed) at least part-time into 2026. As long as we have earned income, we can keep adding new money to the Roths to build more tax-free income once we stop working for pay. And there’s always dividend reinvestment.

This is not how most people approach investing for retirement. The more common approach is accumulating a big pile of money via investing in index funds over a 30-40 year period and then spending it down over an unknown amount of time. That would not have worked for us as we did not start investing until we were in our 40s. The irony is that many retirees sell their index funds and then redeploy the proceeds into income-generating stocks. Another advantage of income investing is that we don’t have to worry about sequence of returns risk. This is the risk of having the market tank just when you retire and you need to sell shares of those index funds after the market has dropped 10% or 20%.

Income investing is not truly passive income. I probably spend about an hour or two a day monitoring the stocks we own and researching candidates to add, but I enjoy doing it.

As an example of what this kind of investing can do, here is what my dividend calendar looks like for June. I tend to dollar cost average into a new position, so some paydays are currently much smaller than others. My total income for the month is a shade over $4,000, with a little more than half of the money landing at the end of the month.

We have been saving up dividends to get ready for full retirement and have a year’s worth of income in the bank. So once we are ready to stop work, we’ll be able to let all dividends accumulate as cash, and just periodically transfer money as needed. We also plan to continue reinvesting a small percentage of dividends in each account, to keep growing the income.

Could I afford a used Rolls Royce or a luxury 6-month around-the-world cruise? Probably, if I wanted to cash out a big chunk of my portfolio. But I’d rather have the steady income and not stress out about money. Another example: on our last flight to attend a family event, we purchased economy seats and after the first leg, my back hurt for the next 2 days. So on the flight home we decided to buy an upgrade to business class, without having to think too hard about it.

I have enough, and that feels like real wealth. Income investing is not everyone’s cup of tea, but it works for me.

Starting on Fridays, I’ll be sharing more with paid subscribers about what I’m doing with my own portfolio, and inviting you to ask questions or share your own moves and thoughts. If learning more about investing for income sounds interesting, please consider upgrading to a paid subscription before June 30th, to get the current price of $6 per month/$60 annually. On July 1, the price will increase to $8.99 per month/$90 annually. Which is still a lot more affordable than $500. Financial education posts on Tuesdays will remain free, as always.