Income-Generating Assets For A Well Diversified Portfolio

September 15, 20225 min read
Income-Generating Assets For A Well Diversified Portfolio
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Key Takeaways

• Assets capable of returning predictable, consistent periodic cash payments are considered income generating.

• Bonds and certain types of real estate investments are among the most common income generating assets.

• Alternative investments can provide a strong opportunity for both diversification and income.

When all is said and done, there are two major types of investments: growth and income. Investors seeking growth leave their earnings in the asset to promote even more growth. In other words, the growth investor prefers opportunities that reinvest earnings, rather than issue dividends. These investors also focus on acquiring assets, the values of which are expected to increase, perhaps exponentially, over time. This typically predicates a long-term mindset with a distant time horizon. 

Income investors, on the other hand, are more interested in reliable and predictable cash payments. Working toward an immediate time horizon to satisfy current needs, these are the people for whom income-generating assets are more relevant to their investing goals. 

What is an Income Generating Asset?

Assets that can be capable of returning predictable, consistent periodic cash payments are considered income generating. With some assets, this happens with no effort on the part of the investor, other than purchasing a position. Others may require a more active role. 

On the whole, dividend stocks, bonds, and certain types of real estate investments are the most common income-generating assets. Here, it should be noted that income-generating assets do have the potential to appreciate in value over time. As a result, they become capable of generating even higher payments as time goes on. 

Asset classes capable of generating income include public and private equities and fixed-income products such as bonds, certificates of deposit, real estate, real estate investment trusts, peer-to-peer lending, and business ownership. 

Income Generating Asset Investment Considerations

While there are numerous opportunities to consider, it’s important for an investor to consider certain factors:

Risk vs Reward – Every investment contains some risk, but it’s a good rule of thumb that risk and reward typically go hand in hand. With that said, the greater the perceived risk, the more substantial the potential reward should be to justify taking it. Therefore, it is important for the investor to consider the potential risks associated with any given asset. 

Time and Energy CommitmentSome income generating assets are entirely passive. The investor purchases a position and the asset performs without any further interaction on the part of the investor. Other assets require direct involvement and can be quite time consuming. Owning a small business for example, will typically require a significant time commitment on the part of the owner. This brings opportunity costs into the equation. The more time an investor must spend managing a single investment is less time the investor has to pursue other opportunities. Each individual must decide if they prefer to be an active or a passive participant in the investment. 

Minimum Investment Requirement – Some investments require a significant amount of cash to participate. Purchasing real estate, or buying a small business, can require a significant cash outlay. Generally, assets that require minimal amounts of cash to acquire positions, better serve fledgling investors. These include publicly traded equities such as stocks and bonds, mutual funds, and real estate investment trusts and the like. These assets also offer greater opportunity for diversification, which is key to shielding a portfolio against market volatility. 

Income Generating Assets and Diversification

Relying upon a single asset, or a single asset class for that matter, can be a very risky strategy. This is particularly true for investors who rely upon income from their investments to defray their living expenses. 

Say, for example, an investor puts everything they have into a small business. This person would suffer a catastrophic loss should that business fail to perform as anticipated. Meanwhile, more diversified investments such as mutual funds and real estate investment trusts spread the investor’s risk over a broader range of assets.  

That is why many experts recommend diversifying an investment portfolio as much as possible. To that end, alternative investments can provide a strong opportunity for both diversification and income. 

Portfolio Diversification and Alternative Investments

One of the benefits of incorporating alternative investments into a portfolio is the diversification that doing so affords. Lacking direct correlation to the markets in general can be an advantage in this regard, particularly during periods of exceptional volatility. 

Traditional portfolio asset allocation envisions a 60% public stock and 40% fixed-income allocation. However, a more diverse 60/20/20 or 50/30/20 split, incorporating 20% alternative assets, could make a portfolio less sensitive to public market short-term swings. 

Real estate, private equity, venture capital, digital assets and collectibles are among the income-generating asset classes deemed “alternative investments.” These were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors who buy in at very high minimums — often between $500,000 and $1 million. 

However, Yieldstreet was founded with the goal of dramatically improving access to alternative assets by making them available to a wider range of investors.

Learn more about the ways Yieldstreet can help diversify and grow portfolios.

Investing For Income vs Growth

The investment strategy chosen should be predicated upon the investor’s overall goals. Young investors with a comfortable income might be better served by a growth strategy initially, then by switching to an income strategy as they get closer to retirement. 

Ideally, gains made during their growth period will enable the acquisition of substantial positions in income-generating assets to help supplemental income during retirement. Dividend stocks and other income-generating investments can provide this security and tend to be less volatile than growth-oriented assets.  

Generally, though, it is likely that most investors would do well to construct diversified portfolios with a mix of income and growth assets, as well as alternatives in both classes. 

This strategy offers the potential to achieve higher gains, while mitigating as much risk as possible, to ensure that investment capital is protected, even as it earns.