Although it seems counter-intuitive, income investing is better for accumulating wealth for your retirement, according to the historical record.
While they're still working, most people concentrate on buying "growth" stocks. These are the kind of stocks pushed by brokers, financial advisers and authors.
The typical growth stock is in technology or some other type of "sexy, glamorous" industry with a story about how it's going to grow fast and therefore become the next Wal-Mart, Microsoft, Dell Computer or Boston Chicken. Sometimes it actually fulfills many of these promises, yet that itself is no guarantee of superior results for investors.
These types of companies are not expected to pay dividends. (I remember once, in the early 1990s, foolishly bragging that if any company I owned stock in paid a dividend, I'd sell it!) They're expected to re-invest their profits into more equipment or whatever is needed to make the company even bigger and more profitable.
Small companies, especially those in highly competitive industries, usually do need to do exactly this to avoid falling behind.
Investors Pay Too High a Price for Growth
The first problem is that when Wall Street expects a small company to grow fast, people and institutions buy small it in large quantities. This drives the price up so that it's trading at a very high P/E (Price divided by Earnings).
This means that investors in that stock must often hold it for five to ten years before its actual earnings grow enough to justify the price they paid for it. And of course, realistically, some companies lose out to their competition. Many never grow as much as your broker promised ten years ago.
How High Can That Company Grow?
The second problem is that, even if a company does grow a lot, at some point it has more cash on hand than it knows what to do with. The Return On Investment (ROI) from building one more widget factory doesn't justify its risk. Their marketing department is working overtime but can still sell only X number of widgets. They've reached a plateau. Now what?
Many companies at that point start buying up small companies. Unfortunately, they're not familiar with those other industries, and the resulting conglomerates don't give good value to shareholders.
You're Better Off ReInvesting That Cash in Your Own Portfolio
When a company pays you stock dividends or bond interest, you are now the one with cash. You can reinvest it by buying more stock shares or bonds. You can buy more shares in that same company (especially when you're using a no-commission Dividend ReInvestment Plan (DRIP) or diversify by buying stocks or bonds in other companies.
Train Your Mind to Celebrate Increases in Shares, Not Portfolio Market Price
Most people look at their brokerage and retirement accounts and care only about one thing -- the total current market value. When it's up, they're happy. When it's down they're upset.
That's a big mistake.
When you invest for income, each share -- whether its of a stock, mutual fund or Exchange Traded Fund -- is a miniature money-generator that sends out dividends or interest.
The more of those miniature money-generators you own, the higher your income from investing.
While you live on your job wages or business profits, you can be accumulating those miniature money-generators. As they generate more money, you buy more money-generators so next quarter you receive even more income.
This is True Wealth Compounding
Many financial advisers and personal finance books extoll the power of compounding your savings. That's good, but when you buy income investments and reinvest the cash you receive from them, you're compounding your income from investing.
In time, the income from your investments can exceed the contributions you make out of your earned income. That's a day to celebrate.
But the greatest milestone comes when you realize your portfolio income is high enough to pay your living expenses.
That's the day you can choose to retire if you wish, no matter what your age.
Meanwhile, Growth Stocks are Stuck at 1999 Prices
As I write this in June 2010, the Dow Jones average is wobbling around the 10,000 mark. The mainstream financial media doesn't like to mention this inconvenient truth, but the Dow first broke that mark in the spring of 1999.
Growth stocks investors have wasted the past eleven years.
Income investors have seen the market prices of their stocks also stagnate, but they've received dividends to reinvest. By reinvesting those dividends they now own many more shares. Therefore, even at the same market price, their portfolios are worth a lot more, because they own a lot more shares than they did in 1999.
Everybody reinvests earnings. Growth stocks leave that up to corporate managers, and hope the stock market will reward them. Through income investing you are able to control how you reinvest earnings.
Author Resource:
You want to build your retirement portfolio without depending on the stock market to go up. Click here to get the information you need to effectively make money from your investments whether the markets go up or down. If you're ready to discover how income investing can help you retire with financial security, visit this page, enter your email address into the form and click on the Submit Button. Then go to your inbox and verify that. It's free for the taking. www.incomeinvesthome.com.
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