Investing for Income

I have a blog about real assets to which I post approximately once per month or so.  I started the blog since I am convinced that owning real assets is important to hedge against the devastating effects of inflation and the loss of purchasing power that results.  The blog discusses such investments as gold, silver, real estate, and the stocks of companies that are involved in owning and processing other real assets such as energy and other commodities.

Increasingly, however, I am beginning to gain a greater appreciation of assets that will produce income.  Everyone needs to have an adequate source of income to provide for the everyday needs such as food, clothing, and shelter as well as the wants that come with living in a modern society.  Most individuals trade time for income in the form of an employment arrangement with an employer.  This works as long as that individual is physically capable of working on a daily basis.  But when retirement arrives, income for daily needs is still required.

Living off savings acquired during the working years is one way to meet daily needs, but this is not the best plan.  It is difficult to know how long you might live after your working days are over or to estimate what expenses might be over a 20-30 year time frame.  As a result, it is best to be able to invest in income producing assets.  Ideally when investing for income, that income will have the potential for growth as well to keep up with inflation and protect purchasing power to some extent.

There are many different types of assets that will produce income. Some require money to purchase but others can be built from scratch using nothing but time. Don't limit your thinking to the conventional sources of income. Investing time and effort can often be more productive and produce greater riches than investing money. The following list is not meant to be exhaustive but is simply designed to stimulate one's thinking when considering investing for income.

1. Real Estate. One of the more common investments when investing for income is income producing real estate. Of course, purchasing income producing property requires a fair amount of capital, but if you have saved a reasonable amount during your working years, real estate is one way to generate monthly income that will beat the returns on any savings or money market account. As long as you don't overpay for an investment property, you also have the potential for some appreciation that could help hedge against inflation.
   
2. Stock Dividends. Stocks that pay dividends can be a wonderful source of passive income. It does take capital to purchase stocks and there is risk that the stocks could decrease in value if the company does poorly. Companies will decrease or eliminate the dividend if cash flow problems affect them. Bankruptcy will wipe out the value of the stock causing the investor to lose his entire investment. Stocks do have the potential to protect and hedge against inflation provided the company has pricing power. It is best to approach stock investing with the mindset of a business owner.
3. Bonds/CDs/Money Markets. I consider these investments together since the primary source of income to the investor is in the form of interest. Bonds are loans to companies or governmental entities that pay interest over a period of time until the bond is sold by the investor to another investor or is redeemed by the borrower. These forms of income can be solid provided that the borrower is financially stable. Theoretically, the riskier the borrower, the more interest that is paid. Currently CDs and money market accounts pay very low levels of interest and will be lucky to keep pace with any future inflation.
4. Commodities. Not all commodities generate an income but I wanted to mention this asset category to stimulate some creative thought. I knew a gentleman whose family owned about 100 acres of forest in southern Indiana and would harvest a few of the trees annually for lumber in order to pay for the property taxes on the land and provide a little additional income to be used for distribution to family members. At other times of the year, the land was used for hunting.
5. Business Ownership. I am thinking about direct ownership of a business that provides an income. Obviously, there are many businesses that can be run by employee managers which require little time from the owner. Developing this stream of income can take time initially but once it is established can provide for financial freedom. You can think of the time spent developing passive income on the internet as a business. This Hub has the potential to become an income producing asset over time which could pay off a hundred or thousand fold my initial investment of time. Assets don't necessarily have to cost a lot of money but time may be the currency required to construct an asset.
6. Selling Options.  It is possible to generate monthly income by selling covered calls or by selling put options against cash in a brokerage account.  These techniques are somewhat difficult to learn but can be very effective in creating additional income.  This is one of the ways that I plan to generate income when I retire.  Selling calls essentially become an additional dividend for the stock and will pay for the protective puts that I purchase to protect my investment capital.
   

Again, the above list is not exhaustive by any means but is simply a framework which you can use to begin thinking about how you might create an income stream that can be used for passive income leading to financial freedom or in retirement to provide for living expenses without having to spend down savings.  Annuities and reverse mortgages are two other products not mentioned that can provide steady income as well.  I welcome any comments on the above suggestions, on investing for income generally, or on any other ideas you might have for creating additional monthly income.