Income investing is a prevalent form of investment strategy as it opens the door to generating a regular income.

Typically, its deployed by investors seeking to protect their wealth rather than grow it. After all, the returns tend to be far more modest. But this comes with the added advantage of a lower level of price volatility in most cases.

Let’s take a closer look at this investing style, and explore its main advantages and risk factors.

What is income investing? 

An income investment can be described as any investment designed to generate some form of passive income. This predominantly refers to dividend stocks. However, other asset classes like real estate and fixed income securities like bonds can also be considered income investments.

An income investor seeks to build a portfolio that provides a continual stream of reliable income without needing to constantly adjust their positions. And when the stock market isn’t having a meltdown, dividend shares can be one of the most lucrative methods of achieving this.

Some stocks even offer dividend payments every month, making them an ideal place to put capital for those in retirement. Even more so, given these types of investments are often considered to be lower risk.

What are the benefits of an income investment?

Income investment offers a lot of benefits to investors. They typically align well with individuals who have long-term financial goals or those looking for a “safer” way to grow their wealth.

Income stocks and bonds tend to be far less volatile than growth stocks and often withstand the extreme fluctuations of the stock market.

Having said that, these types of investments are far from risk-free. For both corporate bonds and dividend paying stocks, the money used for payouts stems from an underlying business’s ability to generate profits. Suppose earnings get impacted, even by external forces, as we’ve seen in recent years. In that case, dividends are likely to get cut, and interest payments may arrive late. In the worst-case scenario, both types of investments could go to zero if the company declares bankruptcy.

That’s why these financial instruments aren’t suitable for every investor. And it’s why there is a golden rule in investing: to only invest money that an individual can afford to lose. But assuming an investor can successfully identify a strong business capable of delivering consistent profits and cash flow, income investing is a lucrative strategy for generating reliable passive income.

What are the types of income investing?

Income investing is an already established way of investment all over the world. There are various types of income investment.

These include:

• Interest Income – This is the profit an investor makes from lending money. Investors get a return on such money by the interest which accrues on the borrowed sum. Interest income plays a crucial role in debt-based investment as it is the investor’s only compensation for lending their money. Examples of interest income instruments include corporate bonds, government bonds, municipal bonds, treasury bonds, and certificates of deposit.
• Dividends – This is the money an investor receives from owning shares in a company. Dividends are ways to earn a regular stream of income. Investors invest in the high dividend-paying stock of successful companies to provide a low-risk portfolio for their financial commitment. Dividends are either paid in cash or additional shares of stock, and distributions occur at specified intervals such as monthly, quarterly, bi-annually or annually. Instead of buying a dividend stock directly, an investor can choose to buy shares in an income fund or investment trust.
• Capital Gains – Generally, any type of asset owned is a capital asset. This is because gains are realised when the asset is sold. Capital gain is an increase in the value of a capital asset, either as an investment or real estate. There are two categories of capital gains: short-term capital gain, which is a gain realised on an asset that is sold after holding for one year or less and long-term capital gain, which is capital gains on assets that are sold after holding them for more than one year.       

What is the difference between income investment and growth investment?

Picking high-quality income investments has a lot of similarities with selecting growth investments. Both require the investor to identify a robust underlying business with plenty of long-term performance potential.

The core difference between these investment philosophies is the expectations of return. Growth investors are looking for stocks whose share price can rise considerably in the long run. While this approach carries a significantly higher level of risk, it can generate enormous returns.

By comparison, income investors are more interested in a stable share price with a consistently increasing dividend payment. This desire for stability is why bonds are a popular alternative for passive income-seeking individuals.

RELATED: 3 Unstoppable Growth Stocks To Buy Now

Final thoughts on income investing

Like all investment strategies, income investing has its advantages and disadvantages. They offer the potential for steady and reliable income while simultaneously retaining a lower risk profile.

It’s ultimately a personal decision as to whether or not this investment style is suitable for an individual, as everyone has different financial objectives. But there’s no rule saying that an investor can’t blend growth and income strategies together.

Prosper Ambaka does not own shares in any of the companies mentioned. The Money Cog has no position in any of the companies mentioned. Views expressed on the companies and assets mentioned in this article are those of the writer and therefore may differ from the opinions of analysts in The Money Cog Premium services.