Is your investing approach to ‘buy and hold forever'?
If your investing approach is to buy and hold onto shares forever, then you belong to the income investing school. Your main focus is investing for dividends. Let's take a closer look at income investing and how you can apply this approach to your portfolio…
When you invest in shares, your approach will fall into one of three main categories. These different approaches are income investing, growth investing and value investing.
Income investing is the closest thing to a pure ‘buy and hold forever’ strategy you can get, Phil Oakley explains in MoneyWeek
You can make money out of shares in two ways:
Consistent dividend payments are vital
Through dividend income; and
Through capital gains
With income investing, the dividend payment
is what matters. Movements in the share price are secondary.
So the key is to find companies that pay high, sustainable dividend yields.
‘Sustainable’ is the key word here. There’s no point in buying a stock for its high yield, if the company then cuts the dividend.
You then buy enough of these stocks, across enough different sectors, so that a disaster for one or two stocks or sectors doesn’t destroy your portfolio. After that, you can just sit on the portfolio and take very little action.
It’s worth remembering that while capital growth isn’t the priority here, companies that manage to pay high, sustainable dividend yields are likely to see their share price rise too. That’s because you can’t pay a solid dividend for long without enough cash coming in the door to pay for it.
This is why dividends are so important. They are among the few gauges of a company’s health that are very hard to fake.
So there you have it, what income investing is and how you can apply it to your portfolio.