Few people realize that income investing is a way to protect yourself from economic problems such as the recession we've been going through.
If you're retired and depending on selling off stocks and bonds to pay your bills, you're in big trouble when the market goes down 50% as it did from November 2007 to March 2009. Or when the stock market in June 2010 is at the same level it first broke in the spring of 1999. In cases such as these, you have to sell off a lot more shares of stock than you intended when you first bought them, back when financial gurus were telling you how the stock market went up an average of 10% per year.
Yes, historically that's true. However, that average includes years when it jumps up 25% and years when it sinks 40%. In good times, we tend to forget about the downside risk.
When Does the "Long Run" Finally Arrive?
The experts like to tell us to invest for the long run. In the long run, stocks will return 10% on average, they insist. The trouble is, the long run is twenty to thirty years. When you're sixty-five years old, you're likely to think that in the long run you'll be dead.
And when you're selling off shares or bonds, there is no long run. You get what the market gives you, and then they're gone.
To be fair, I must agree that income from investments is not protected by a guarantee from God.
Investing Income Can Suffer from Economic Slowdowns
Sometimes companies keep their dividends the same instead of raising them, or they cut their dividends, or even discontinue them altogether. In 2009 Real Estate Investment Trusts were allowed to distribute additional shares of stock in lieu of the cash payments their shareholders expected. A few Master Limited Partnerships failed, and several more were taken over or taken private.
Companies Meeting Basic Human Needs Always Have Customers
However, income investments hold one big advantage over so-called "growth" stocks. In general, they're issued by companies which are older and more stable, because they produce goods and services proven to have great demand in the marketplace.
A company with a new tech toy can make a lot of money in good times. But a company selling a well-established brand of fast food will make money in both good and bad times. Maybe not as much profit in bad times as in good times, but something.
People must buy food. Even the unemployed turn on their lights. Even the disabled heat their homes in the winter. Everybody uses gas, even if they ride a bus. Everybody drinks water. Everybody needs a place to live. Everybody needs money.
That's why utility stocks, established consumer brands, Real Estate Investment Trusts, Master Limited Partnerships and banking stocks are traditionally the biggest income stocks.
(Yes, the financial crisis hurt banks a lot, and caused dividend cuts. However, it just shows that the government will do everything possible to keep the financial system operating. And now banks are profitable again, despite problems that would have destroyed many industries -- because we need them.)
We Can't Survive Without Most Companies that Produce Income
People have basic needs. We lived for hundreds of thousands of years without computers, televisions or movies. But we still need food, water, fire, shelter and clothing just as much as our primitive ancestors. We consume those things in different forms, but they're still vital to our physical existence.
Demand for the basics can go down during recessions and depressions, but never to zero.
Thanks to income investing, you can take advantage of that to protect your wealth during the economic bad times and uncertainty we're currently living through.
Author Resource:
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