Investing for income: traditional and innovative practices

By James Frazier

Recently, I went on a business trip to meet with current and potential clients.  Perhaps not surprisingly, among all the topics that came up in conversation, one theme consistently stood out: People’s incomes are getting squeezed by a tight jobs market and low interest rates, and they are increasingly looking to their investment portfolios to help boost income and make ends meet.

JF money in eggThe main challenge with investing for higher income is that the risks are also higher.  With bonds, for example, investors are paid higher interest rates when they lend to borrowers with lower credit quality who are at greater risk of default.  Interest rates are at historical lows, making the situation even more challenging.  Not only do bonds pay relatively low interest, but if interest rates go up, bond prices will go down, reducing the overall returns.  Meanwhile, there’s not a whole lot of room for interest rates to go down and boost bond returns.  No wonder investing for income is challenging in this environment!

Many people are turning to stocks for income.  Stocks can pay nice dividends, but their value generally fluctuates much more than bonds.  Fortunately, reliable dividend-paying stocks tend to be less volatile than non-paying stocks.  When it comes to holding stocks or bonds for income, investors must determine how much risk they can tolerate, and adopt a long-term time horizon.  Ultimately, diversifying across a range of stocks, bonds, and other investments, such as income producing real estate or real estate investment trusts (REITs), is the best way to lower risk and achieve a reliable investment income.

Creativity can pay off when you consider the income possibilities of non-traditional investments.  For example, loaning money directly to local small businesses can generate a solid yield while keeping your investment dollars close to home.  

Local investors receive higher returns than they would get from bank CDs, while business owners often pay lower interest rates than they would pay to a bank.  Your community becomes more financially self-sufficient; it’s a win-win for everyone.

If you can take advantage of abundant federal and state tax credits, renewable energy can produce healthy income as well.  Installing solar and wind power systems and making energy efficiency upgrades on your home can generate attractive returns while reducing the fossil fuels that are burned to power the grid.  Money that you would have spent on taxes, electricity, or fuel bills becomes cash in your pocket, which counts as income in my book!  Your investment also grows with the increase in the value of your home.  With a little ingenuity, as we like to say, you can do well and do good.

For some, ratcheting up the risk or “creativity” in their portfolios to reach for more income isn’t an option that feels right.  Let’s also remember that the other side of making ends meet is keeping expenses under control.  Frugality may be a semi-forgotten art, but it’s making a big comeback these days in some circles.  To be sustainable, frugality needs to be more about sharing the abundance that we already have than going without.  It can be a fun exercise in building community; my favorite way to cut costs is to share things with friends and neighbors, such as tools, vehicles, land, internet connections… You name it.  To be sure, most of us can find plenty of unnecessary expenses to eliminate as well.  Done consciously, these kinds of changes can lead to more fulfilling lives.

What if we consider any activity that takes an initial investment of time and money, and pays you back continuously in the future, as an income investment?  Vocational training that allows you to take advantage of a job opportunity would fit the bill.  Another example is planting a garden.  It requires the investment of seeds, soil, water, and some “sweat equity,” while paying you back with food (which means saving money instead of spending it) and more seeds to keep the whole thing going.  Then, you can sell (or better yet, trade or gift) your excess abundance within your community.

Clearly, not many financial advisors would recommend that you plant a garden for income, but after all, we are Natural Investments.  You’re probably reading this article because you want unconventional solutions that create positive impact in the world while meeting your financial needs.  Do you have any novel ideas or approaches for investment income I haven’t mentioned here?  If so, I’d love to hear them

This article first appeared in the Spring 2012 edition of the Natural Investment News

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James Frazier

Welcome to my archive of newsletter articles and blog posts. For more information on my service offerings, please go to my advisor webpage.

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