Income investing intimidates some investors.
I worked on Wall Street for a decade helping investors manage risk. I was on one of the elite trading desks at Goldman Sachs. After that, I went to medical school and became a board-eligible eye surgeon. All the while, I've been semi-retired and using my savings to produce income to live and invest.
But in 2008, I launched my first newsletter with my publisher, Stansberry Research... which let me share my investing ideas and help my readers live a healthy and wealthy retirement.
I love helping people build wealth and be healthy. Learning finance and medicine from the inside showed me how easily I could help people empower themselves.
Despite what folks think, income investing is actually easier than picking growth stocks or trading options, once you know how to do it...
That's because income investing is focused on stability and a long-term approach. But, that said, one mistake tends to hold people back...
During the past few years, I've figured out what keeps people from proper income investing. It requires initiative and effort to take control of your financial future.
But even once you understand that, investors – and income investors in particular – still tend to get sidetracked.
Most new investors learn the basics of how stocks work. For income investing, that's not enough.
To be a successful income investor, you can't limit yourself to just dividend-paying stocks. You need to diversify your portfolio with bonds, real estate investment trusts ("REITs"), master limited partnerships ("MLPs"), exchange-traded funds ("ETFs"), annuities, and certificates of deposit ("CDs"), to name a few.
But no matter what you're buying, if there's one thing income investors should remember at all times... it's to buy value.
By that, I mean you should always pay a fair price for what something is worth.
It seems simple... But it's the first thing investors forget. The latest hot stock tip or brand-new technology story can quickly push a stock's valuation into the atmosphere.
Value investing is one of the greatest investing strategies of all time. It was created by the father of modern investing analysis, Benjamin Graham. Back in 1934, he laid out how to buy stocks with low price-to-earnings (P/E) ratios and low price-to-book (P/B) ratios in his book Security Analysis.
Graham's ideas have been tested and proven to be profitable by dozens of academic studies. They even helped to make superinvestor Warren Buffett his fortune.
In 1949, Graham published The Intelligent Investor. In it, he explained why you should only buy stocks when their P/E ratios are less than 15 and their P/B ratios are less than 1.5. That strategy has also been proven successful over the years.
But I don't subscribe to any hard-and-fast rule. P/E ratios don't always apply to exactly what we're investing in. And markets change... so we can't count on one single number for the rest of time.
The one rule you should follow for every investment you make is to write down a compelling argument for why it's undervalued...
Maybe the stock is cheaper than its competitors... or the market as a whole. Maybe it has a better product than its competitors. But whatever your reasoning is, you should force yourself to do this exercise every time. That will keep you away from investing in popular, overvalued stocks.
If you've ever thought of becoming an income investor, now is the time to start...
Yields are up across the board. There is a lot of safe income to be made today... Make sure you get a piece of it.
Here's to our health, wealth, and a great retirement,
Dr. David Eifrig
Editor's note: It's easy to get burned in today's market if you don't understand how to make it work for you. That's why last week, Doc shared his No. 1 strategy... something he believes is the market's "best-kept secret." It's a simple way for you to take the worry out of your investing and collect a nearly 8% yield, plus capital upside. Get the full story here.
"Wealth has grown faster than production," Doc explains. As a result, over hundreds of years, interest rates have been trending in one direction... down. But short-term spikes can create rare opportunities to collect safe income. And right now, we're in one of those times... Learn more here.
"A lot of useless information is floating around the web and on TV... information that could steer your investments in the wrong direction," Doc writes. Don't be fooled into acting on every headline or blip in the charts. You're much more likely to succeed if you use this mindset... Read more here.