Income investing diversified with Dividend Stocks, Bonds and REITs (Continued)

Income investing should balance high growth secured income sources with Dividend paying Stocks, Bonds and REITs with strategy.

As your investments are powering along with secured real estate portfolios in emerging markets, it is prudent to inculcate other key passive income generating sources to your portfolio for diversification. This should now include bonds, REITs and dividend paying stocks in that order. Let’s look at what these are about, the processes and what we can expect.

 Bonds

A bond is a debt investment in which an investor loans money to an entity (corporate or governmental) that borrows the funds for a defined period of time at a fixed interest rate. Bonds are used by companies, municipalities, states and U.S. and foreign governments to finance a variety of projects and activities.

Bonds are commonly referred to as fixed-income securities. The issuer of the bond is the indebted entity that issues the interest rate (coupon) and date when the payments will be made by (maturity). Interest on bonds is usually paid every six months (semi-annually). The main categories are Corporate, Municipal, US Treasury bonds, notes and bills usually referred to as “Treasuries”.

It is considered best to invest in 5-8 years maturity bonds as opposed to longer ones like 30 years as the longer maturity can introduce large fluctuations (even equivalent to those of stocks) due to the increased change in interest rate over a longer period. This in essence can defeat the safety net bonds are renown for. Returns are usually on the lower side up to 5% per year due to the guarantees hence more safety offered to the investor. Utilizing investment fundamentals here you might say, how can I diversify this bond investment? A possible way to do this will be to invest in Bond Funds. The latter are funds that invest in bonds and debt securities. They usually pay dividends more frequently than individual bonds including periodic capital appreciation. So you might say how much should I be investing in bonds? Burton Malkiel, a famous ivy league educator and author of “ A random walk down wall street" suggests that whatever your age is, that is the percentage of your portfolio you should be invested in bonds. So at 30, invest 30%.

REITs

REIT stands for Real Estate Investment Trusts. It is a corporation or trust that uses the pooled capital of many investors to purchase and manage income property (equity REIT) and/or mortgage loans (mortgage REIT). REITs are traded on major exchanges just like dividend paying stocks. There is usually no minimum investment  with REITs. It is highly liquid as with stocks.

Income investing with REITs can allow diversification if the Investment Trusts invest in various real estate asset classes such as residential, commercial, industrial, hospitals/healthcare facilities, hotels and more. REITs are given a special tax status and have to meet certain requirements to maintain the tax status some of which include requirements for the following:

  • 90% of the annual taxable income must be distributed to shareholders
  • 75% or more of investments and Gross income must be in Real Estate investments , investments in other REITs, and or Government securities
  • No less than 5 people can hold 50% or more of the shareholding.
  • It must have  minimum of 100 shareholders

You can expect relatively good returns with Real estate investment trusts to be in the 12%-18% range. One advantage over stocks and mutual funds is investors are not subject to the broker fee issues on trades that tend to reduce the investment income as you are a shareholder of the corporation that conducts its business. More details may be found at our REITs page.

Investors should have the right investment management team that will facilitate the passive income investing combination of high profits of real estate in emerging markets, with mortgage Notes (Cash Flow), bonds REITs and dividend paying stocks, contact our adept team today.

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