Income investing involves putting your money into dividend-paying stocks.
These stocks have a track record of paying out regular, consistent dividends that act as a stream of passive income.
The following are some of the rules that I adhere to when it comes to effective income investing.
They are in no particular order of importance as all are worth taking note of.
Rule Number 1: Don’t check your shares too frequently
Checking prices daily when you are investing for three years or more is a bit like planting a seed and inspecting it every hour.
With share markets forever abuzz, noise gets mistaken for signal, and overtrading is the result.
Sit on your hands if you must. But the easiest way is to not tempt yourself in the first place.
Rule Number 2: Do make a plan and adjust it infrequently
Investing is like starting a garden: clumsy results stem from buying whatever catches your eye at your local garden centre.
Gardens need a plan, and a proper investment plan considers how your stocks relate to each other.
Knowing what you need and what you don’t helps you to pounce on the best deals.
Rule Number 3: Don’t anchor on the price you paid for a share
It is arbitrary to everyone but you.
And it also does not change the fact that the business may be a lot different now, so focus on the present and future rather than hanging on to the past.
Rule Number 4: Do forget the “flavour of the month” shares
There is a big danger to buying shares in companies just because everyone is talking about them.
If everyone is talking about them, then their share prices are likely to be high.
The time to buy is when companies are out of favour because that is when the shares are likely to trade at attractive valuations.
Rule Number 5: Don’t focus on the yield and yield alone
It can be a mistake to go for the highest-yielding shares, especially those that yield significantly more than the market average.
So, look for companies that may not have super-high yields but instead have reliable yields that do not depend on strong economic growth.
Rule Number 6: Do remember that you can reinvest your dividends elsewhere
No law says you must put dividends back into the companies that paid them.
If you feel that another share within your portfolio is better priced, it could be better to divert one company’s pay out to top up a position in another.
You might be wondering, at this point, why income investing seems so attractive?
It is really quite simple.
A portfolio of dividend shares will generate a stream of income for you forever.
That is a good enough reason for holding onto the shares in good companies that were bought at a good price, for as long as they remain good companies.
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Disclaimer: David Kuo does not own shares in any of the companies mentioned.
