It's only natural for investors to want to know what kind of return they can expect from an income investment?
Unfortunately, real life does not always accommodate simple and easy answers -- especially the ones we want to hear.
Two Kinds of Income Investments
I divide income investments into two kinds: fixed income and growth income.
Bond Returns are Simpler to Calculate
Fixed income investments generally are bonds.
From my point of view, the expected return of bonds is fairly simple and easy. It's the coupon rate (normally paid semi-annually) until the maturity date, at which time they return your principle.
There are potential complications. Many corporate bonds come with a call feature, which often kicks in after five years.
This gives the company that issued the bonds the right to "call" them back from you anytime after the fifth year.
Why would they want to do this? They do it when you least want them to. That is, they do it when market interest rates are now significantly lower than they were when the bond was issued.
Say you buy a bond paying 10%. Five years later, interest rates have declined to 6%. You think you were really smart to buy that bond and collect 10% when bonds now pay only 6%.
With the call feature, the company is even smarter than you. They'll call that 10% bond from you. They'll give you your money back of course, but then you'll have to reinvest it and receive only 6%.
The market face value of bonds goes up and down through their lifetime. If interest rates go higher, your bond's market resale value goes down.
If interest rates go lower, your bond's market resale value goes up. (However, so does the risk of it being called away from you.)
According to the usual experts, this affects the bond's "return."
I Count Only "Returns" I can Spend
However, I don't count "returns" that are only on paper. To me, an investing return is not a real return unless it's spendable cash in my pocket. Therefore, I advise you not to sell bonds. Take the coupon rate until maturity.
You Can Calculate Current Stock Yields
When you buy stocks, you can know only the rate of return or yield that it is now. If you pay $100 per share for a stock paying a $2 per share dividend, your rate of return is currently 2%.
But Not Future Dividend Increases
However, you should not buy stocks for their current dividends, but for their future dividends.
Some companies have a long history of raising dividends.
Some industries have a long history of paying good dividends.
Some kinds of companies, such as Real Estate Investment Trusts and Master Limited Partnerships, are required to pay good dividends. And they have a history of increasing their dividends.
However, none of this is guaranteed. And the future is not set in stone.
The company that increases its dividend by 5% this year may do so by 10% next year -- or 1%. Or not at all.
The Stock Market has Lost Eleven and a Half Years . . . and Counting -- Unless You Receive Dividends
However, if you invest for capital gains, you may get no return at all. As I write this, the Dow Jones Industrial Average closed at a number it first saw in the spring of 1999. Nearly eleven and a half years ago.
But income investors have seen a real -- cash, spendable -- return from nearly every income investment.
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