The Six Types of Income Investing: Sorted by Risk

Income investing is my favorite type of passive income by far. However, it’s not for most people, and it takes an above-average knowledge of financial systems.

If you are up for the challenge, I can briefly tour this wonderful “hobby.” Income investing can help you free yourself from the chains of employment much earlier than you think.

1. From Dirt to Dividends 1: Gardening & Preferred Shares
2. From Dirt to Dividends 2: Livestock & Closed-End Funds
3. From Dirt to Dividends 3: Insects & Business Development Companies
4. From Dirt to Dividends 4: Community Farming & Mortgage REITs
5. From Dirt to Dividends 5: Composting & Dividend ETFs
6. From Dirt to Dividends 6: Vermiculture & High-Yield Blue-Chip Companies

I wrote about each of the six types of income investing in my “From Dirt to Dividends” series. Today I will rank them by risk profile to help you understand where to start. Let’s begin.

Your Income Should Increase Every Year

1) Dividend ETFs (Risk: Low). Dividends ETFs are pretty much index funds that include only dividend-paying stocks. My favorite Dividend ETFs are SCHD and DHS.

They are a great place to start; however, don’t expect to receive a ton of income. Dividend ETFs are currently yielding roughly 4%. Articles to read:

1. Dividend ETF vs. Index Funds
2. Dividend ETFs vs. Bonds
3. Dividends ETFs vs. Bonds 2

2) High-Yield Dividend-Paying Stocks (Risk: Moderate). Picking individual stocks is risky because one company can go bankrupt.

However, when you diversify, you lower your risk dramatically. I recommend buying 15-20 different high-yield companies like Altria (MO), AT&T (T), Verizon (VZ), Phillip Morris (PM), and Kinder Morgan (KMI). Articles to read:

1. My 24 Favorite Blue-Chip Stocks
2. Blue Yield: High-Yield Blue-Chip Stocks

3) Business Development Companies (Risk Moderate). BDCs are blue-chip stocks; however, they do not sell products to consumers. My favorite BDCs are Ares Capital (ARCC) and Owl Rock (ORCC).

BDCs are companies that lend money to small businesses. They are very similar to banks, but sometimes they can acquire equity in these small businesses. Since they are in the loan business, they are sensitive to interest rates. Article to read:

1. Love Income? Try Business Development Companies

4) Preferred Shares (Risk: Moderate to High). Preferred shares sit higher on the food chain than common stocks.

Net Worth vs. Passive Income

Preferred shares only become risky if you chase yield and invest in companies you don’t know. If you buy preferreds from Bank of America (BAC), AT&T (T), and Public Storage (PSA), your risk is extremely low.

I like to chase yield, so I have a greater risk profile. You can also invest in preferred funds to lower your risk appetite. There are funds with no leverage (PFF) and some with leverage (PFFA).

1. Preferred Shares vs. Treasury Bonds
2. Individual Preferred Shares vs. Preferred Funds
3. Preferred Shares vs. Common Stocks

5) Closed-End Funds (Risk: High). The majority of closed-end funds utilize leverage, meaning they are extremely sensitive to interest rates.

You can find closed-end funds across all sectors, but I like PIMCO funds (PDO, PDI, PTY) that focus on bonds and income. I also have CEFs that focus on municipal bonds (NVG), Collateralized Loan Obligations (ECC), infrastructure (UTF), and utilities (UTG). 

1. Preferred Shares vs. Closed-End Funds
2. Love Income? Try Closed-End Funds

6) Mortgage REITs (Risk: Extreme). Mortgage REITs are the easiest way to invest in Mortgage-Backed Securities, which generally represent the housing market.

However, they are extremely sensitive to interest rates. You must understand treasury bonds and MBS tactics to invest in these securities. The two biggest mREITs are AGNC (AGNC) and Annaly Capital (NLY).

1. Mortgage-Backed Securities vs. Treasury Bonds

Where should you start? The best place to start is with securities you can find on STASH and Cash App.

They are good because you can slowly dollar cost average into your positions over time. Some examples are ARCC, MO, T, AGNC, SCHD, and PFF.

Once you get the hang of income investing, you can move on to more obscure products. M1 Finance has many closed-end funds.

5 Steps to (Financially) Running a Household

However, you’ll need a fully featured brokerage account to buy preferred shares, smaller BDCs, and lesser-known closed-end funds.

I use Wells Fargo and Charles Schwab as my higher-end brokerage accounts. Wells Fargo has the best income calendar for your dividend portfolio.

The benefits of income investing. “There are no risky investments, only risky investors.” Robert Kiyosaki said this in “Rich Dad, Poor Dad.” 

Investing for Interest 102: Super Safe Savers

Income Investing is actually low risk if you understand tactics. Everything that has to do with income derives from interest rates and treasury bonds.

When interest rates are low, people love high-yielding products like CEFs. When interest rates are high, why take a risk on CEFs?

You can avoid this game of cat and mouse by purchasing stock that produces a product like Altira (cigarettes). However, these companies depend on a strong economy to make big profits.

Santa’s Bringing Dividends

Conclusion. You will lower your risk profile significantly if you diversify between rate-sensitive instruments, consumer-facing companies, and housing trusts (REITs). 

Don’t expect to learn all this in one day or even one year. Take a small amount of money and get started. As you learn more, invest more.

You will start to hear the news and see how it affects your portfolio. Eventually, you’ll begin to make your own predictions and have your own convictions; then, you will be a true income investor. Good Luck!

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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it.  I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing