Why It Pays to Diversify Your Income

By: GenXinvestor

Welcome to my post on why it pays to diversify your income.  Since writing my article on Passive Income Streams, I’ve worked hard to try to diversify as much of my income as possible.  I don’t want to rely on any one source of income forever because that is simply too risky.  So diversifying my income sources as much as possible seems like the logical thing to do.  After all, the most pressing problem that most people have when it comes to their finances is that they don’t have any other sources of income beyond their paycheck.

Diversify Your IncomeI’m a firm believer that getting regular income from my investments is a far better approach than relying on capital gains when I sell them.  My long term goal is to grow my investment income from all sources to fund my eventual retirement.

Some of you may be interested in building alternative sources of income so here’s a snapshot of my investments and the income that they generate.  My approach is by no means perfect, but I feel like I’m on the right track as I try to balance the risks associated with each type of investment.

Dividend Stocks

Dividend stocks represent the largest portion of my investment income.  In 2016, I’m on track to receive approximately $6k from this source of income.

What I like about dividend stocks is that, with few exceptions, they pay me each and every quarter.  Most of the dividend stocks that I hold are blue-chip companies that have been in business for a very long time.  Because of this, I feel that they are a relatively dependable source of income.  So far this year, the majority of my companies have raised their dividend payout anywhere from 3% to 20%.  So not only do they pay me regularly, but periodically they increase their payout.

It’s important to be aware that dividends are by no means a guaranteed form of income.  In fact, I’ve had 2 companies cut their dividend this year.  On the whole though, I’d have to say that I’ve done quite well owning dividend paying stocks over the past decade and I still reinvest all of my dividend income to buy more shares in great companies, as well as continue to make regular monthly share purchases so that my dividend income keeps on rising.

Index Funds

Because the majority of my dividend stocks are Canadian, I use index funds to help keep me diversified.  This is one area that I need to improve on.  With the Canadian dollar so low and Canadian stock so cheap, I find it hard to invest outside of Canada right now.  Still, these index funds contribute approximately $2,500 annually to my investment income.

Bond Funds

Bond yields are at historic lows.  So I don’t keep a lot of money in bond funds.  All told, I probably get about $500/year from my bond holdings.  Most of that income is from short-term bond funds.  Despite their low yields, I continue to believe that bonds still play a role in stabilizing an investment portfolio.  This is especially true considering all the stock market volatility that we’ve seen in the past year.

Cash

One area where I’m consistently weak is in regards to my (non-existent) cash holdings.  I tend to either pay down debt or invest every bit of cash that I get my hands on.  I’ve prioritized building assets rather than building up cash reserves in an emergency fund.  I guess I’ve always felt like if I were ever in a pinch, I could borrow on a line of credit or stop reinvesting my dividends and possibly even sell some stocks to meet any immediate need.  I think I might start to build a small emergency fund now that we own a rental property.

Rental Property

We’ve had the rental property now for over 6 months and it’s working out well for us (so far knock on wood).  On the whole, it will probably add about $6k to our investment income this year.  I’d like to buy another rental if I can find a good one.  These days, cash-flowing real estate is scarce.  That said, I recently saw an article in Moneysense that claimed there are some areas in Canada where real estate can be a decent investment.

Blog Income

MRTWAF has been around for 2 years and it’s now earning a small but steady stream of income from ad revenue.  It’s certainly nothing to brag about that’s for sure, but it does cover the cost of the website which is alright by me.  That said, some bloggers have been quite successful in monetizing their blog.

But I never started this blog to make money – ask any blogger out there and you’ll find that blogs are quite time consuming and that there are easier ways to make a buck.  I started this blog because I enjoy writing and want to write about things that I’m passionate about like personal finance, retirement, dividend stocks, real estate and investing.  I plan to keep writing for many years to come and hope that you enjoy my articles.

Thank you all for your support and thanks for reading this post on why it pays to diversify your income.

Photo Credit:  Photo by Stuart Miles/Freedigitalphotos.net

2 thoughts on “Why It Pays to Diversify Your Income

  1. Dividend Reaper

    MRTWAF,

    You’re a heck of a lot more diversified than I am. I stick to a 100% equity portfolio. No bonds for me! At least, not as long as the bond market is pumping out such minuscule returns. I may get hit harder when the market comes down a bit but I’d rather make a solid dividend return on equities than spend my time searching through bonds as well. I know it’s not the smartest idea but it’s a strategy none the less!

    Glad to know that you focus more on content than on trying to make money on your blog. Like all things in life, if you put your heart into it the returns should follow. Keep at it!

    -Dividend Reaper

    Reply
    1. GenXinvestor Post author

      Hi Dividend Reaper, personally, I don’t see anything wrong with a 100% equity portfolio if you can stomach the huge swings in the market. For the average person though, I doubt that they’d be able to handle the volatility that goes with that kind of market exposure. I feel that the stock market is really a long term game and that most people worry about it too much in the short term. Thanks for the kind words of encouragement.

      Reply

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