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When discussing the extremely wealthy paying a lower tax rate, we often refer to their effective tax rate. Folks like Warren Buffett talk about having a lower tax rate than his secretary because a great deal of their income comes from investments. Long-term investment gains and dividends are taxed at different rates. As a result, the uber-wealthy are taxed at a lower rate than many of us working stiffs.

Income investing isn't just for the wealthy, though. It's possible for you to build an income portfolio as well, although it might take a little longer than you expect. Without a large amount of capital, you will need to carefully consider how you build your portfolio over time and realize that it can take 20 years (or more) to get your portfolio to the point that it provides you with a significant revenue source.

But, with the right planning and some persistence, income investing can eventually provide you with an alternative revenue source that provides you with income diversity.

Why You Should Consider Income Investing

Most of my income investing is making sure that many of my assets pay dividends. For example, I famously focus on index funds, and most of these pay dividends. I automatically reinvest my dividends to keep pumping up my portfolio. Eventually, the hope is that, rather than reinvest the dividends, I can use the dividends as one of my income streams.

There are a number of reasons to consider income investing. Some of those reasons include:

• You can get to the point where you have some passive income to shore up your finances.
• Some investment income, such as long-term capital gains and dividends, comes with lower tax rates.
• Many income investments are reasonably stable. While there is still risk involved, many income investments perform relatively well even in times of economic turmoil.

It's also worth noting that it's often fairly simple to get started. There are a number of online brokerages that offer low-cost investments. You can start with fairly low minimums — some as low as $0 to begin. This means that you can use dollar cost averaging as you build your income portfolio. By building up a little at a time, you make steady progress. You can also reap the benefits that can come when you are able to get some of your investments “on sale.”

Choices for Income Investing

In some cases, the income you receive from one asset may not be huge. Right now, it may seem as though you aren't receiving much from a quarterly dividend of $0.50 a share. But over time, as you add more shares and as you consider the rest of your dividend portfolio, the results improve.

Here are some of the investments to consider as you build an income portfolio:

• Dividend-paying stocks: You can use these to not only build your capital but also to receive regular payments from the company. Your payout is based on how many shares you have. It's also possible to reinvest some of your dividends automatically in order to get more shares now. This can help you build your dividend portfolio quicker.
• REITs: Real Estate Investment Trusts pay dividends and can add a little diversity to your portfolio.
• Bonds: There are a number of different bond options. These include Treasury bonds, corporate bonds, foreign bonds, and municipal bonds. Some bonds have preferential tax treatment (like munis). You receive regular interest payments during the term and get your principal back at the end.
• Funds and ETFs: There are a number of mutual/index funds and ETFs that have low costs and that invest in income assets. These can make it easier to diversify, as well as spread out your risk a bit.
• Income property: It's also possible to add income property to your portfolio. If you are cut out to be a landlord, it's possible for you to earn a monthly income from the rent tenants pay. However, you often need capital to start with.
• Business: Starting a business can be a way to invest in yourself in order to see regular income now and in the future. But starting a home business requires hard work and some risk.

Bottom Line

Each type of investment carries risk. You can lose your capital in any of these, and you need to be careful of the investment decisions that you make. It's also important to remember that no matter what you do, there is no magic solution for your finances. You need to research your options and build a portfolio that works for you. At first, it can require an outlay of time and effort, and you need to come up with the capital (which is possible in many cases if you can invest using the principles of dollar cost averaging).

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