It is very important to realize that the establishment of an income strategy and portfolio is much different than creating a growth strategy. A specific income amount is usually decided upon for the income strategy and that is limited by the amount that can be safely produced income generated from the total investment that is being committed, and applied to produce income. The difficulty is the amount of income that can be “safely produced” in the form of dividends from the investments. Making sure the investments are compatible and suitable with the risk level of the client is crucial.
This process is made more difficult by the fact that usually several different type of investments or different asset classes need to be used in the income portfolio.
The goal is to provide steady income from the principal while keeping the principal safe and which requires having a low volatility of the account value. The clients understanding of that volatility is paramount.
The most common income investment is a bond, but there can be many other different types of asset classes to be used within the income strategy to produce steady reliable income.
It is absolutely necessary to have great diversification in income programs and not to rely upon one single or a few income investments. Very often in an inappropriate situation, a small amount of principal is asked to produce a larger amount of income than which could be reasonably produced. Also it is crucial to remember that some income-producing investments can be more volatile than others and create more risk than others.
Finally, an income investor should realize that every income strategy is unique and specific to the particular needs of the client.