Having an income stream from investments isn't only for the retired. It can be a valuable backup during uncertain economic times, and it can provide the extra income you might need to avoid the pressures of earning a hand-to-mouth living. Such an income stream is called passive income, and there are several ways of attaining it through investment strategies and certain investment products that are geared to providing an income stream.
Common stocks that pay dividends and preferred stock, which pays a fixed dividend, are two types of stocks that can provide reasonably reliable income. Preferred stock pays a specified amount of income on a quarterly or bi-annual basis, and if the issuing company has financial trouble and can't meet its interest payments, you have first call on the proceeds of liquidation ahead of common stockholders . Dividend-paying stocks, such as utilities and some corporations, also pay quarterly, but dividends can be raised or lowered, depending on the financial performance of the company, and can even be halted. A benefit of dividend stock is the dividend reinvestment plans, or DRIPs, that most have available to their investors. DRIPs reinvest your dividends into additional shares of stock, allowing for accumulation of shares and increasing income over time. Equity income mutual funds are diversified portfolios of these stocks, so your income stream is unlikely to be affected by problems at a single company.
Bonds pay a stated amount of annual interest, split into a payment every six months, for a stated number of years. When your bond matures, it returns the face amount of principal, which is normally $1,000 per bond. If you apply that principal repayment to the purchase of a new bond, you will continue to receive income, though it will probably be a different amount depending on the current level of interest rates. Bond mutual funds and other fixed-income packaged investments will provide regular income, but it also can vary depending on market interest rates.
When you buy an annuity, you buy an income stream made up of investments in various high-quality securities. If you don't need an immediate income stream, accumulate money in your annuity through regular monthly payments, then annuitize -- which ends your investment phase and starts the income payments. There are different strategies that can meet different kinds of income flow needs, so consult an annuity specialist to determine which kind of annuity or combination is best for you.
Buying houses and renting them out provides a different kind of passive income. Building a portfolio of rentals entails maintenance expense and rent collection, which can be performed for you by a management company. A major benefit from building income through rentals is that you build a fairly stable asset base as you receive income. Another type of passive income is peer-to-peer lending -- making personal loans to consumers and small businesses. These might yield higher returns, but they also represent higher risk.
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