Investing for Beginners- 10 Steps to Successful Income Investing for Beginners

10 Steps to Successful Income Investing for Beginners

1

 The First Step to Putting Together Investments That You Can Live Off Of for Life

Do you need to build a portfolio that will generate cash? Are you more concerned with paying your bills and having enough income than growing richer? If so, you need to focus on something called income investing. This long-lost practice used to be popular before the great twenty-year bull market taught everyone to believe that the only good investment was one that you bought for ten dollars and sold for twenty. Although income investing went out of style with the general public, the discipline is still quietly practiced throughout the mahogany-paneled offices of the most respected wealth management firms in the world.

In this special feature on income investing, you're going to develop a better understanding of income investing, which types of assets might be considered appropriate for someone who wanted to follow an income investing philosophy, and the most common dangers that can derail an otherwise successful income investing portfolio. At the very least, you will be armed with some things to consider before contacting a broker or money manager.

Income Investing Defined

Before we begin, let's define income investing precisely so you know exactly what it is. The art of good income investing is putting together a collection of assets such as stocks, bonds, mutual funds, and real estate that generates the highest possible annual income at the lowest possible risk. Most of this income is paid out to the investor so he or she can use it in their everyday lives to buy clothes, pay for the mortgage, take vacations, cover living expenses, give to charity, or whatever else they desire.

2

 How the Social Unrest of the 20th Century Gave Birth to Income Investing

Despite the nostalgia for the 19th and 20th centuries, society was actually messy. I'm not talking about the lack of instant news, video chats, music-on-demand, twenty-four hour stores, and cars that could go more than ten miles per gallon. No, I'm talking about the fact that if you were Jewish or Irish, most companies wouldn't hire you, if you were gay or lesbian, you were sent off to electroshock therapy, black men and women dealt with the constant threat of mob lynching and rape, people believed that all Catholics were controlled by the pope, and if you were a woman, you couldn't get a job doing anything more than typing, for which you would be paid a fraction of the amount offered to a man for similar work. Oh, and there wasn't social security or company pension plans, resulting in most elderly people living in abject poverty.

What does that have to do with income investing? Everything. These are the circumstances that caused the rise of income investing and when you look a bit deeper, it's not difficult to understand why.

The Rise of Income Investing

For everyone except for well-connected white men, the decent paying labor markets were effectively closed. One notable exception: If you owned stocks and bonds of companies such as Coca-Cola or PepsiCo, these investments had no idea if you were black, white, male female, young, elderly, educated, employed, attractive, short, tall, thin, fat - it didn't matter. You were sent dividends and interest throughout the year based on the total size of your investment and how well the company did. That's why it became a near ironclad rule that once you had money, you saved it and the only acceptable investing philosophy was income investing. The idea of trading stocks would have been anathema (and nearly impossible because commissions could run you as high as $200 or $300 per trade in the 1950's).

3

 The Widow's Portfolio Bursts Onto the Scene

Then

These social realities meant that women, in particular, were regarded by society as helpless without a man. Up until the 1980's, you would often hear people discussing a portfolio designed for income investing as a "widow's portfolio". This was because it was a fairly routine job of officers in the trust department of community banks to take the life insurance money a widow received following her husband's death and put together a collection of stocks, bonds, and other assets, that would generate enough monthly income for her to pay the bills, keep the house, and raise the children without a breadwinner in the home. Her goal, in other words, was not to get rich, but to do everything possible to maintain a certain level of income that must be kept safe.

This whole notion seems bizarre to us. We live in a world where women are just as likely to have a career as men, and if they do, they may very well make more money. If your spouse died in the 1950's, however, you had almost no chance of replacing the full value of his income for your family. That's why income investing was such an important discipline that every trust officer, bank employee, and stock broker needed to understand. Those days are gone. After all, when was the last time you heard AT&T referred to as "a widow's stock", which could have very well been it's second name a generation or two ago.

Now

Today, with the pension system going the way of the dinosaur and the wildly fluctuating 401(k) balances plaguing most of the nation's working class, there has been a surge of interest in income investing and how you can structure your assets to bring in passive income. In the next few pages, you'll learn the type of assets you may want to buy if you think income investing is right for you.

4

 How Much Cash Should I Expect from an Income Investing Portfolio?

The 4% Rule

The rule of thumb for income investing is that if you never want to run out of money, you take 4% of your account balance out each year. This is commonly referred to on Wall Street as the 4% rule. (Why 4%, you ask? If the market crashes, 5% has been shown in academic research to cause you to run out of money in as little as 20 years, whereas 3% virtually never did.)

Put another way, if you manage to save $350,000 by retirement at 65 years old (which would only take $146 per month from the time you were 25 years old and earning 7% per year), you should be able to make annual withdrawals of $14,000 without ever running out of money. That works out to a self-made pension fund of roughly $1,166 per month pre-tax.

Not Running Out of Money

If you are the average retired worker, as of 2016, you receive $1,346.72 in social security benefits. Add the two together and you have monthly cash income of $2,512.72, or $30,152.64 per year. All else being equal, an income investing portfolio structured this way wouldn't run out of money, whether you lived to 67 or 110 years old. By the time you retire, you probably own your own home and have very little debt, so absent any major medical emergencies, that should allow you to meet your basic needs. You could easily add another $5,000 or $6,000 to your annual income by doing part-time work in the community.

If you're willing to risk running out of money sooner, you can adjust your withdrawal rate. If you doubled your withdrawal rate to 8% and your investments earned 6% with 3% inflation, you would actually lose 5% of the account value annually in real terms. This would be exaggerated if the market collapsed and you were forced to sell investments when stocks and bonds were low. Within 20 years, however, you would only be able to withdrawal $500 to $600 per month at a time when that represented the same as only $300 today.

5

 What Types of Investments Should I Hold in an Income Portfolio?

3 Types of Investments to Consider

When you put together your income investing portfolio you are going to have three major "buckets" of potential investments. These are:

1.        Dividend Paying Stocks: This includes both common stocks and preferred stocks. These companies mail checks for a portion of the profit to shareholders based on the number of shares they own. You want to choose companies that have safe dividend payout ratios, meaning they only distribute 40% to 50% of annual profit, reinvesting the rest back into the business to keep it growing. In today's market, a dividend yield of 4% to 6% is generally considered good.

2.        Bonds: Your choices when it comes to bonds are vast. You can own government bonds, agency bonds, municipal bonds, savings bonds, and more. Whether you buy corporate or municipal bonds depends on your personal taxable equivalent yield. You shouldn't buy bonds with maturities of longer than 5-8 years because you face duration risk, which means the bonds can fluctuate wildly like stocks in response to changes in the Federal Reserve controlled interest rates.

3.        Real Estate: You can own rental property outright or invest through REITs. Real estate has its own tax rules and some people are more comfortable with it because it naturally protects you against high inflation. Many income investing portfolios have a heavy real estate component because the tangible nature lets those living on an income investing portfolio drive by the property, see that it still exists, and reassure themselves that even if the market has fallen, they still own the deed. Psychologically, that can give them the needed peace of mind to hang on and stick to their financial plan during turbulent times.

Let's look at each category closer to get a better idea of appropriate investments for income investing portfolios.

6

 What To Look for In Dividend Stocks for an Income Investing Portfolio

Positive Characteristics of Dividend Stocks

In our personal income investing portfolios, we would want dividend stocks that had several characteristics such as:

• A dividend payout ratio of 50% or less with the rest going back into the company's business for future growth. If a business pays out too much of its profit, it can hurt the firm's competitive position. According to some academic research, a lot of the credit crisis that occurred between 2007-2009 and changed Wall Street forever could have been avoided if banks had lowered their dividend payout ratios.
• A dividend yield of between 2% and 6%. That means if a company has a $30 stock price, it pays annual cash dividends of between $0.60 and $1.80 per share.
• The company should have generated positive earnings with no losses every year for the past three years, at minimum. Income investing is about protecting your money, not hitting the ball out of the park with risky stock picks.
• A proven track record of increasing dividends. If management is shareholder-friendly, it will be more interested in returning excess cash to stockholders than expanding the empire, especially in mature businesses that don't have a lot of room to grow.
• A high return on equity, or ROE, with little or no corporate debt. If a company can earn high returns on equity with little or no debt, it usually has a better-than-average business. This can provide a bigger cushion in a recessionand help keep the dividend checks flowing.

These can help you understand the type of dividend stocks you may want to consider when building an income investing portfolio:

• What Is Dividend Yield and How Is It Calculated?
• All About Dividends - A 5 Part Guide to Everything You Ever Wanted to Know About Dividends
• Selecting High Dividend Stocks
• Why Dividend Stocks Tend to Fall Less
• Determining a Stock's Dividend Payout Ratio

Now, onto bonds!

7

 Bonds in an Income Investing Portfolio

Characteristics of Bonds to Consider or Avoid

Bonds are often considered the cornerstone of income investing because they generally fluctuate much less than stocks. With a bond, you are lending money to the company or government that issues it. With a stock, you own a piece of a business. The potential profit from bonds are much more limited but in the event of bankruptcy, you have a better chance of recouping your investment.

That’s not to say bonds are without risk. In fact, bonds have a unique set of risks for income investors. Here’s what we would be looking for if we were putting together an income investing portfolio with bonds:

• Your choices include bonds such as municipal bonds that offer tax advantages. A better choice may be bond funds, which you can learn all about in bonds vs. bond funds. You can learn more by reading tests of safety for municipal bonds, which will explain some of the things you may want to look for when you are choosing individual bonds for your portfolio.
• One of the biggest risks is something called bond duration. When putting together an income investing portfolio, you typically shouldn’t buy bonds that mature in more than 5-8 years because changes they can lose a lot of value if 

Finance Careers- Why Job Titles Matter for Careers

Why Job Titles Matter for Careers

Job titles are badges of authority. Not getting the correct job title appropriate to your position, duties, authority and achievements can undermine your standing both inside your company and with key outsiders such as clients. Additionally, not getting the job title that you are due can hinder your pursuit of future career opportunities, both inside your current firm and as a potential outside hire by other employers.

You probably will be seen unfairly as someone who actually is at a lower level of achievement than the one you have attained. Please also see our closely related article on the matter of what job descriptions mean.

Job Title Scenarios

In one scenario, an employee gets a de facto promotion but does not get an upgrade in job title to that of the former incumbent. This may signal either a downgrade in the importance of that job, or be utilized as a not so subtle device by company to lower the level of compensation associated with that position.

Sometimes, people are hired into firms or enticed into changing jobs within firms based on promises about future upgrades in job title. Unfortunately, where these agreements are purely verbal, as they often are, there is the risk that management may renege on them, even by claiming never to have made them. The danger is especially high when there is a change of supervisor for the employee in question, and the new manager denies being bound by his predecessor's promises.

Difficulties in getting an upgrade in job title may occur for worthy employees even if they do not lead automatically to higher compensation. Managers may be using the denial of upgrade strictly as a means to assert their authority.

Another job title scenario is one in which your management grants you an upgrade in job title, but your human resources (or HR) records do not reflect it.

When this occurs, it is typically an error of omission, but in some machiavellian firms, it can be intentional. A case study follows.

Case Study in Job Title Errors

An actual case study in human resources (or HR) errors involved someone hired with the explicit understanding that he would get an Assistant Vice President (or AVP) title immediately upon starting work with a new employer, a leading financial services firm. During the course of over 4 years in a position at corporate headquarters, that person got every indication that he indeed was an AVP. This included the title on his business cards, his eligibility for an office rather than a cubicle, the design of the nameplate on his office, the amount of vacation time to which he was entitled, and even the title as it appeared on various personalized human resources documents in his possession.

After those 4 years at headquarters, this person moved to a job in a different division of the firm, a separate legal entity with its own human resources department and payroll system. More than a full year after that, he was utterly surprised when his current boss congratulated him on being upgraded to an AVP title. When his human resources records were transferred with him to his new division, an indication of his previous possession of the AVP title inexplicably had failed to come across as well.

When the employee pointed out that he already was an AVP from day one with the firm, his current manager investigated and determined that, somehow, there were errors in how the personnel records were maintained, and in how they were transmitted internally. Luckily, the employee quickly was able to get an upgrade to full Vice President instead, which actually was long overdue by that point in his career, given both his total tenure with the firm and his performance to date, which had merited stellar reviews from all previous managers as well.

The Meaning of Job Titles in Finance

The financial services industry has unique conventions regarding job titles. Knowing these will help you evaluate job opportunities and your career progress. Two other closely related topics are why job titles matter and what job descriptions mean. Follow the links for articles covering these issues in depth.

A Quick Digression Regarding Other Industries

For those pursuing careers in financial management or financial analysis in industries other than financial services, two points are worth making.

First, if you choose to work for a relatively young firm in a field such as technology, media or creative services, you may receive a rather quirky or idiosyncratic title that will be meaningless (or, worse yet, seem frivolous) to more traditional firms, should you later want to change employers.

Second, if you join a very large and bureaucratic firm, you may be assigned a job title that gives no real hint of your actual responsibilities, and thus may confuse a new prospective employer. This is especially so if you hold a relatively unique position. It is possible that the firm will not create an appropriate title, but instead assign you an existing one that seems "close enough."

For example, in its final few decades, the vast bulk of the white collar workforce in the old Western Electric division of AT&T consisted of engineers and computer programmers. The latter got job titles such as Information Systems Staff Member (ISSM) or Information Systems Senior Staff Member (ISSSM).

Western Electric also employed a contingent of economists, management scientists (often called quants today) and financial analysts to forecast sales, support budgeting processes and analyze competitors. Because their number was relatively small, they were not deemed to merit a unique set of job titles, and thus were categorized as Information Systems Staff.

This was confusing for hiring managers in other AT&T affiliates, never mind for those outside AT&T.

Vice President

Most noteworthy is the liberal fashion with which financial services firms give employees the rank of Vice President. In other industries, this designation is reserved for a handful of the most senior executives. In a financial services firm, Vice President generally is an honorific earned by an individual, or an indicator of rank, rather than a descriptive attached to a specific position in the firm. A Vice President title often is conferred as a promotion in place, with the recipient retaining his or her current job and responsibilities.

Because so many management employees eventually become Vice Presidents, there typically is a hierarchy within this broad category. For example, by the late 1990s Merrill Lynch had this menu of VP job titles for support staff, with the highest at the top:

• Senior Executive VP
• Executive VP
• Senior VP
• First VP
• Director
• VP
• Assistant VP

Among the above, only the two varieties of Executive VP actually attached to specific jobs within the corporation. Director was introduced by Merrill Lynch in the late 1990s, as a way to single out certain VPs for special recognition while leaving them in place.

By contrast, getting an upgrade to First VP usually required holding a job at a higher level in the organizational hierarchy. To complicate matters further, First VPs might have Directors or ordinary VPs as their peers on the organization chart.

An upgrade in job title may or may not bring an automatic increase incompensation, or in the potential for future increases. Benefits such as vacation time typically do indeed increase with such upgrades. The rules vary among employers.

Within the universe of producers there normally is an entirely separate hierarchy of Vice Presidents, with different criteria for admission and different benefits associated with each level.

For example, a financial advisor might be elevated to VP-Investments or First VP-Investments based on reaching specific quantifiable criteria related to the size and profitability of his or her book of business.

Career Planning- Why You Should Choose a Financial Career SHARE

Why You Should Choose a Financial Career

The financial services industry, as well as financial disciplines common to all industries (such as accounting), have long histories of attracting energetic and ambitious people who are looking for the best career opportunities. Focusing on the financial services industry, here are a few of its most significant selling points for prospective employees.

Compensation

The financial services industry is noted for compensation structures that are, overall, much more generous than in other sectors of the economy.

See our more in-depth discussion of compensation for details. In particular, successful financial services sales professionals tend to be especially well paid, both relative to other employees in this industry and especially in comparison to sales people in other industries.

Advancement

Compared to other industries, the financial services firms tend to place less weight on seniority in judging the readiness of employees for advancement. High performers can move ahead regardless of age, making this industry particularly attractive for ambitious young people in a hurry.

Getting Started

Breaking into the financial services industry presents increasing challenges today due to the consolidation of financial firms and the scaling back of traditional entry points such as financial advisor training programs and the renowned Goldman Sachs Junior Analyst Program. Nonetheless, financial internships are growing in importance as avenues to the best jobs in the industry.

Bureaucracy

Many of the leading firms tend to be relatively thinly-staffed. There are comparatively few layers of management. Decision-making tends to be rather quick. Your opportunities for getting face time in front of senior management also tend to be excellent. That is, these firms do not normally operate in a highly formalized, chain of command fashion which is more typical of slower-footed traditional industrial companies.

You also are more likely to juggle multiple responsibilities within a given job category, often ranging far beyond the official job description, compared to the norms in other companies. Bureaucracy should be an important consideration in choosing employers.

Pace

A premium is placed on quick thinking, quick acting, and constant production of results. This can be trying for some people, exhilarating for others. The thin staffing and comparative lack of bureaucracy requires exceptionally hard work, focus and commitment to stay afloat, let alone to succeed. For those who do, however, the rewards are commensurately great.

Caveats

As a general rule, the banking and insurance sectors of financial services tend to be rather more bureaucratic, more deeply staffed and less remunerative at all levels than firms whose principal lines of business are in (for example) securities brokerage (or financial advisory services), investment banking, securities trading, investment management (or money management), and/or securities research. These latter types of firms include what is commonly called Wall Street.

Tips for Choosing Employers

When considering employers, determine whether the internal culture appears to mesh with your own preferences. If you are ambitious and eager to advance, here a few things to assess, to gauge your opportunities for promotion. Keep in mind that employers often make false or deliberately misleading assertions to attract job applicants.

Seniority: ​

Overall, compared to other industries, financial services firms tend to place much less weight on seniority in promoting employees.

In this context, seniority can refer to your length of service at your current firm, within the industry or across your entire working history. Stated somewhat differently, candidates for promotion generally are sought among those with outstanding recent performance rather than among those who have "paid their dues" over long, solid but unspectacular careers.

That said, there are cultural variations between firms and between sectors of the industry. As a general rule, Wall Street firms tend to anchor one end of the spectrum, the most amenable to fast advancement.

Bureaucracy: ​

As a quick test of how bureaucratic a company is, see how many layers of managers are between the lowest-level employee and the top person, who may be called something like CEO (Chief Executive Officer), President or Chairman. The layers may differ by division. Request a detailed organization chart to evaluate this for yourself.

With more layers of management, decision-making tends to be slower and the company may be somewhat more conservative and rule-bound. However, more layers of management may present more promotional opportunities. Meanwhile, in thinly staffed firms, with fewer layers of management, your opportunities to made a discernible impact and to gain notice among senior management tends to be excellent.

You also are more likely to juggle multiple responsibilities within a given job category, compared to the norm in other companies. Moreover, your formal job description may not necessarily capture the full range of your duties, or the amount of multitasking ultimately required of you.

Another test of bureaucracy is the employee handbook, describing employees' duties, rights and responsibilities (not to be confused with the employee benefits handbook). Its thickness and level of detail indicates how rule-bound and well-defined the work environment is.

Chain of Command: ​

With a strict chain-of-command protocol, directives and information flow from management level to level in straight succession. A manager will rarely call directly on a subordinate who is two or more levels below, or who is not in his own organization. Work moves more slowly and your opportunities to interact directly with senior management will be more limited.

Management Models: ​

Management models reflect the general manner in which employees and their efforts are organized. It is vital for career success and satisfaction to choose an employer whose management model is compatible with your own preferences.

Adherence to Rules: ​

The culture of some organizations exempts powerful people from adherence to fundamental rules.

Weak governance of this sort can be a recipe for trouble. It also complicates the jobs of employees in rule enforcement roles.

The Arc of Tragedy:

The arc of tragedy is a process by which once-great organizations decline and fall. Recognizing whether a current or potential employer is falling into this trap is a key to intelligent career management.

Span of Control:

This is the number of people under a given manager. There will be significant variations even within a company, across its departments and management levels. More layers of management combined with smaller spans of control generally offer greater promotional opportunities.

However, this scenario threatens wholesale elimination of management levels and consolidation of management peer positions in a future cost-cutting exercise.

Financial Strength:

The meltdown of several venerable financial services firms in 2008 suggests that, before accepting a job offer, conducting a thorough analysis of the prospective employer's financial strength and stability is highly advisable. This may require enlisting professional help, such as from a financial advisor or financial planner. With the caveat that investment professionals generally failed to recognize the magnitude of problems in those firms until it was much too late, it nonetheless is wise in the current environment to know as much about a prospective employer as is possible.

Also, consider the impacts of industry consolidation and the opportunities for telecommuting. Additionally, a recent survey of employee satisfaction in finance is illuminating.

Finance Careers- Financial Controller Careers

Financial Controller Careers

The Financial Control Function

Budgeting is a key function of controllers and their staff, including the counting of spending and revenues. As this job title suggests, they "control" access to corporate funds, exercising an important fiduciary responsibility. In many situations, professionals in the controller's organization must approve expenditures. Becoming a controller is a natural career progression for accountants and auditors, but not every controller position actually requires such prior experience.

Controllers typically are part of the organization headed by a company-wide or divisional chief financial officer (CFO). In smaller companies and organizations, the roles of controller and CFO may be combined. Also note that larger companies may have corporate budgeting and project analysis departments in addition to their networks of divisional or departmental controllers.

Meanwhile, in government, officials with the title of treasurer often either perform the duties of a controller or supervise others who do. Moreover, an alternate spelling, comptroller, is often seen in government. Indeed, in some jurisdictions, such as the City of New York, the comptroller is an elected position.

More Detail

 In most companies controllers and their staffs have responsibility for management reporting systems, developing reports and analyses that are crucial to the management of the business.

In larger companies, they also are involved in the design and maintenance of transfer pricing methodologies and systems. In addition to the measurement and analysis of corporate profitability, controllers often work closely with people in the marketing function, especially product managers, in setting pricing policies for the company's products and services.

In lean organizations, controllers can have broad job descriptions or a number of unstated additional duties, assuming a variety of additional roles. In these situations, controllers often have assignments and ongoing responsibilities that cross over into fields, such as human resources, market research, general data analysis, product management, product development, corporate strategy, business forecasting, and liaison with information technology groups, among many others. Additionally, since controllers often find themselves in matrix reporting situations, they often serve as de facto chiefs of staff for their superiors on the business or operational side (as opposed to their superiors in the financial organization).

A large corporation will have multiple layers of controllers, depending on how its hierarchy of departments and divisions is organized. Working in a controllership function can be an excellent way to gain a broad knowledge of the business. 

In the financial services industry, controllers frequently work closely with compliance and risk management departments.

Importance of the CPA

While holding a CPA can help one advance in controller positions, or to rise to the post of a divisional or company CFO, it is not always necessary, especially in lower-level positions.

Policies differ by company.

Controllers and Information Technology

In technology-intensive companies, including much of the financial services industry, controllers and CFOs should develop at least a rudimentary understanding of key IT concepts and issues. This will give them the necessary expertise to evaluate IT proposals and plans, which can have huge financial and strategic impacts. Cloud computing, for example, is a hot topic in IT today (as well as in risk management) and financial professionals thus should at least a passing familiarity with the concept.

Traits of the Ideal Controller or CFO: Follow this link for a detailed discussion of how the best of the best distinguish themselves.

Salary Range

The Bureau of Labor Statistics (BLS) places controllers within its broad category offinancial managers. Follow the latter link for details on earnings.

Within the financial services industry, controllers often are paid considerably more than the overall averages for financial managers, or for controllers in other industries. Also note that since there may be controllers at various levels within a company (such for departments, business units, divisions, subsidiaries or the company as a whole), pay will vary, of course, based on the level at which a given controller is placed. Finally, geographic pay differentials are bound to influence pay by location.