There are so many different types of investments available that it might make your head spin. But we can narrow that down because we’re only concerned with assets that provide income opportunities.
If you stick with assets classes that are available through brokerage accounts, you can eliminate the bottom half of this post. Your list may get even smaller when you bounce your goals and preferences against it.
Each type of investment has its own characteristics, risk levels, and potential returns. This post gives you the highlights of each so you can get familiar with your options before we go deeper.
Brokerage Account Investments
Stocks
Stocks represent ownership shares in a company. When you buy shares of a company’s stock, you become a partial owner and can benefit from potential price appreciation and dividends.
Growth companies prioritize reinvesting in growth and development while others reward their investors. These companies distribute a portion of their earnings back to shareholders in the form of dividends.
Bonds
Bonds are debt securities issued by governments, municipalities, or corporations to raise capital. They offer a relatively stable and predictable income stream, making them attractive to risk-averse investors.
When you invest in bonds, you’re essentially lending money to the issuer in return for periodic interest payments (coupon payments). Your principle amount then gets returned at the bond’s maturity.
Preferred Stocks or Preferred Shares
Some companies have both common shares and preferred shares. Preferred shares are considered a hybrid between a common stock and a bond, because they’re issued with a set coupon rate.
The dividend for the common shares is usually higher, but if the company doesn’t have enough to pay all of their shareholders, the preferred shareholders get precedent of payout over the common stock holders.
Preferred stocks have more security because they’re very structured. You get the dividend you were promised and it’s on time unlike how payments can change or be canceled with common shares.
CDs or Certificates of Deposit
CDs are time deposits offered by banks with fixed terms and interest rates. They’re a low-risk investment that provides a predictable income stream over the CD’s term.
They typically offer higher interest rates than regular savings accounts, but may have penalties for early withdrawal.
Mutual Funds
Mutual funds pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities. They offer diversification and are available in various categories.
They’re managed by professional fund managers who make investment decisions on behalf of the investors. Income-oriented mutual funds focus on generating regular income for investors.
ETFs or Exchange-Traded Funds
ETFs are investment funds that trade on stock exchanges. They track an underlying index or asset class and provide investors with a convenient way to gain exposure to a diversified portfolio of securities.
Income-focused ETFs typically consist of dividend-paying stocks, high-yield bonds, or other income-generating securities.
REITs or Real Estate Investment Trusts
REITs are companies that own and manage income-generating real estate properties. By investing in REITs, you receive a share of the rental income and capital appreciation generated by the properties in their portfolio.
This is a way to invest in real estate without needing to physically own or manage it yourself. You get all of the perks without any of the headaches. And they pay healthy dividends.
There are many different kinds of REITs choose from: regular properties, warehouse, offices, commercial, data storage, cloud storage, healthcare, marijuana, etc.
Open-Ended Funds and Close-Ended Funds
Open and close-ended funds pool money from multiple investors to invest in assets like bonds, preferred stocks, or REITs. At first glance they seem similar to mutual funds or ETFs, but they’re actually in their own category.
Close-ended funds issue a limited number of shares, making them different from open-ended funds, which continually issue new shares.
I prefer close-ended because the finite number of shares keeps their NAV price predictable. This makes it really easy to implement value investing.
BDCs or Business Development Corporations
BDCs are publicly-traded companies that invest in and provide financing to small and mid-sized businesses who don’t meet traditional bank lending requirements.
These are appealing investments options, because their unique tax structure allows them to distribute a significant portion of a BDC’s profits as dividends to shareholders.
BDCs manage their risk of lending to these small and growing companies by charging higher interest rates that are subject to increases if the Federal Reserve rises interest rates.
They also use senior secured loans. This means that the borrower has to put up other company assets as collateral to back their loan.
MLPs or Master Limited Partnerships
MLPs are publicly traded partnerships that are typically involved in the energy infrastructure sector, such as pipelines, natural gas processing plants, or storage facilities.
They offer attractive dividend payouts to investors, because they’re required to distribute a significant portion of their income to shareholders.
Because they have a unique tax structure, they avoid corporate taxes. This enhances their income-generating potential for investors. MLPs do have specific tax implications and risks, so be informed before investing.
Other Income Investments
High-Yield Savings Accounts
While not a traditional investment, high-yield savings accounts offered by banks provide a safe and relatively low-risk option for earning interest on cash holdings.
The interest rates are typically higher than standard savings accounts, but lower than many other types of investments. They are however, quite liquid and might be useful when you have short-term goals.
Rental Properties
Rental properties can be an attractive investment that offers cash flow through rental payments from tenants.
Since these are tangible assets, it provides the potential for long-term appreciation, increasing the overall return on investment. They can also act as a hedge against inflation, as rental income can rise over time.
Effective property management and proper tenant screening are vital to maximizing returns and maintaining a reliable income stream from these income-generating assets.
P2P or Peer-to-Peer Lending
Peer-to-peer lending is a financial model that enables individuals to lend and borrow money directly from each other through online platforms.
Lenders have the opportunity to earn interest income on their investments. These platforms typically employ credit assessments and risk evaluations to match borrowers with suitable lenders.
Annuities
Annuities are insurance contracts that can provide a guaranteed income stream over a specified period or for life. They are commonly used for retirement income planning to ensure financial stability.
You can make a lump sum payment or regular contributions to the annuity over time and receive payments immediately or defer them until a later date.
It’s essential to carefully assess the terms and fees associated with annuities, as they can vary widely and impact the overall income potential.
Business or Royalty Income
These are businesses you might be interested in helping fund or co-own in exchange for being provided profits or revenues generated from their business or creative works.
These need to be vetted very cautiously since they’re high risk. I recommend avoiding these until you have a lot of extra money to take chances. There’s always the possibility of losing your investment completely in this area.
Other Income Investments
This post outlines the different investing options that have dividend and interest payouts. In case you were wondering, my personal favorites are the close-ended funds, preferred shares of stocks, BDCs, and REITs.
I hope a few of these asset have piqued your interest. Those are the ones you should start digging into first. Make sure that each asset you consider aligns with your goals and preferences.
It’s important to do a thorough fundamental analysis before you acquire an asset. That should include a risk assessment. Also don’t forget to diversify and disburse your funds across different assets in your account.
