Guide to Credit Card Annual Fees

To pay or not to pay — that’s the big question when it comes to choosing between a credit card that comes with an annual fee and one that doesn’t.

A credit card annual fee is the price that some cardholders pay to use a certain credit card. While there are plenty of credit cards on the market that don’t come with an annual fee, the credit cards that charge an annual fee tend to have better cardholder perks that can outweigh the cost of the annual fee if the card is used optimally.

Keep reading for more insight into annual fee credit cards.

What Is a Credit Card Annual Fee?

What does an annual fee mean on a credit card? Annual fees are costs charged by credit card issuers to help finance cardholder perks, such as travel credits and free checked luggage on flights.

The amount of an annual fee factors into how much a credit card costs overall, and it varies from card to card. Credit card annual fees can start as low as $39 and go as high as $995 for luxury credit cards.

Usually how credit cards work is that cards with sky-high annual fees also offer a lot of extra perks to make the credit card worth the money. For instance, the cardholder may gain exclusive access to an airport lounge or be able to tap into competitive introductory reward bonuses.

However, there are cases where an annual fee is charged for credit cards designed for consumers with low credit scores. These credit cards don’t offer great rewards, and instead give consumers with poor credit a chance to repair their credit by using credit cards responsibly. Eventually, the goal is for the cardholder to improve their credit so they can qualify for credit cards with lower interest rates and better perks.

Recommended: Does Applying For a Credit Card Hurt Your Credit Score

How Do Credit Card Annual Fees Work?

When you pay the annual fee on a credit card varies depending on your card issuer. Credit card issuers either charge annual fees on either a yearly basis, or they may divide the fee up into smaller monthly installments.

If your fee is charged once a year, then it usually will appear on your first statement after you open your account. You’ll then get charged every 12 months thereafter. In the instance an annual fee is divided into smaller monthly payments, these will get included on the monthly statement the cardholder receives.

You pay your credit card annual fee just like you’d pay any other credit card charges listed on your monthly statement.

Recommended: What is a Charge Card

Which Credit Cards Typically Have an Annual Fee?

There are three main types of annual fee credit cards. Let’s take a closer look at each type.

Reward Cards

Credit cards that can offer a high-value rewards structure or that have a strong introductory bonus often come with an annual fee. If the card is used strategically, it’s possible to earn enough rewards to cancel out the cost of the annual fee and other cardholder fees. You may earn rewards like cash back, travel points, or discounts on specialty purchases.

Recommended: Can You Buy Crypto With a Credit Card

Premium Credit Cards

A premium credit card that offers luxe perks like private airport lounge access or a travel concierge is likely to charge an annual fee to use the card. If you’re considering one of these cards, make sure to crunch the numbers to make sure you’ll use enough of the perks to offset the cost of the annual fee.

Secured Credit Cards

A secured credit card is designed to help consumers with bad credit scores improve their credit. These cards require a deposit to “secure” the card, and that amount also usually serves as the card’s credit limit. On top of the deposit, secured credit cards often carry an annual fee.

For some, the cost may be worth it for the opportunity to improve their credit score, which can make it easier to qualify for lending opportunities in the future. Still, make sure it’s within your budget.

Recommended: What is the Average Credit Card Limit

How Are Credit Card Annual Fees Charged?

So, when do you pay an annual fee on a credit card? As briefly mentioned above, some credit card issuers charge the annual fee once a year, while others split up the annual fee into smaller monthly installments.

The annual fee shows up on the credit card statement alongside normal credit card charges, and the cardholder pays the annual fee as part of that month’s credit card bill. Remember that even if you have an authorized user on a credit card, it’s still the primary cardholder’s responsibility to make payments, which includes any fees.

Recommended: When Are Credit Card Payments Due

Avoiding Credit Card Annual Fees

If you’re trying to avoid credit card fees, it’s entirely possible to avoid paying annual fees. There are plenty of credit cards on the market that don’t charge an annual fee at all.

If someone is interested in a credit card with an annual fee, such as a premium rewards card, they can try to get the first year’s annual fee waived. Some credit card issuers offer to do this from the get-go. However, if someone is an existing cardmember with the issuer and their introductory offer doesn’t include waiving the first year’s fee, they can request a one-time waiver.

Before signing up for a credit card with an annual fee, it’s important to evaluate your spending habits. You want to ensure that you can comfortably afford to cover the annual fee for the credit card. Also investigate whether you’ll earn enough benefits from the card to justify the cost of the annual fee.

Recommended: How to Avoid Interest On a Credit Card

SoFi’s Credit Card

The SoFi credit card is a rewards credit card. Cardholders can earn 2% unlimited cash back rewards when redeemed to save, invest, or pay down eligible SoFi debt. They earn 1% cash back when redeemed for a statement credit.1 Plus, cardholders can access discounts with popular retailers.

The SoFi Credit Card offers unlimited 2% cash back on all eligible purchases. There are no spending categories or reward caps to worry about.1



Take advantage of this offer by applying for a SoFi credit card today.

FAQ

How do you pay the annual fee on your credit card?

If someone has an annual fee credit card, the annual fee will appear on their credit card statement. The fee may appear every 12 months or in smaller increments on a monthly basis. The cardholder then pays this fee as a part of their monthly bill in addition to any other purchases they made with the credit card during that billing cycle.

How can I avoid paying annual fees on my credit card?

Alongside choosing a credit card that doesn’t charge an annual fee (there are plenty of options on the market), a consumer may be able to get the first year of an annual fee waived as a new cardholder incentive. It only makes sense to open a credit card with an annual fee if the account holder’s spending habits line up with the rewards structure of the credit card. That way, they can earn enough cash back, miles, or other perks to outweigh the cost of the annual fee.

Do all credit cards have annual fees?

There are tons of great credit cards on the market that don’t come with annual fees. There’s never a reason to pay an annual fee if someone decides that’s not a good use of their money.


Photo credit: iStock/Rudzhan Nagiev
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

The SoFi Credit Card is issued by SoFi Bank, N.A. pursuant to license by Mastercard® International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

1See Rewards Details at SoFi.com/card/rewards.

1Members earn 2 rewards points for every dollar spent on purchases. No rewards points will be earned with respect to reversed transactions, returned purchases, or other similar transactions. When you elect to redeem rewards points into your SoFi Checking or Savings account, SoFi Money® account, SoFi Active Invest account, SoFi Credit Card account, or SoFi Personal, Private Student, or Student Loan Refinance, your rewards points will redeem at a rate of 1 cent per every point. For more details please visit the Rewards page. Brokerage and Active investing products offered through SoFi Securities LLC, member FINRA/SIPC. SoFi Securities LLC is an affiliate of SoFi Bank, N.A.

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Credit Card Miles vs. Cash Back: Guide to Choosing Between Cash Back and Travel Rewards

Credit cards often offer rewards to incentivize you to apply for a credit card and use it. Cash back cards and miles cards are two common types of rewards cards. The former gives you cash rewards, while the latter offers miles or points that you can use toward a purchase.

Both types of rewards can end up being quite valuable for cardholders. But how do you decide whether you want to earn miles vs. cash back? Here’s a look at cash back vs. travel rewards cards to help you decide which is right for you.

What Are Points and Miles Credit Cards?

Points and miles credit cards are technically two types of rewards cards, a broader category within what a credit card is. Points cards give you points that you can redeem for things like travel, merchandise, or cash back to reward you for your spending. Generally, a point is worth about $0.01, though that varies by card and, in some cases, what you choose to use your points for. For example, you might earn more points for travel than you do when you redeem your points for gift cards.

Miles cards usually offer airline miles associated with an airline’s frequent flyer program. You can earn them by using a credit card that’s co-branded with a specific airline, or a card that’s a more general travel card. With co-branded cards, you can redeem miles with that airline or their partner airlines. Cards that aren’t co-branded may allow you to use your miles with various airlines.

As with points, airline miles are typically worth about $0.01, though the value of each mile might differ depending on when you book your travel and what type of seat you purchase.

Recommended: Does Applying For a Credit Card Hurt Your Credit Score

Pros and Cons of Points and Miles Credit Cards

Before signing up for a miles or points card, it’s important to consider the advantages and disadvantages.

On the one hand, points and miles cards both offer travel-related perks, though miles cards may only offer travel through specific airlines. Cards may also come with bonuses to help incentivize you to apply for a credit card.

However, miles and points cards may charge a hefty annual fee that helps the credit card company offset the cost of providing the rewards program. With co-branded cards, you typically cannot transfer miles to other airlines. Additionally, the value of your miles may vary according to a variety of factors, such as the date you choose to travel or the seat you want to sit in.

Recommended: What is a Charge Card

Pros of Points and Miles Credit Cards Cons of Points and Miles Credit Cards
Reduce the cost of travel. Can’t transfer miles to another airline loyalty program.
Provide travel-related perks. Value of points and miles may vary.
May come with a sign-up bonus. Points and miles cards may charge large annual fees.

What Are Cash Back Credit Cards?

Cash back credit cards offer you cash as a reward for making purchases with the card. For example, your card might offer you up to 3% cash back on all purchases, which means that for every $100 you spend, you’ll receive $2. Cash back cards usually let you redeem your rewards for cash via statement credit, bank transfer, or check.

Cash back cards can be flat-rate cards, meaning you’ll earn a fixed percentage on every purchase. Or, they worked based on a tiered system. For example, some cards will offer you higher rewards for certain purchases, like travel, groceries, or gas. In some cases, cards may have rotating rewards categories that change every few months.

Related: Enjoying Credit Card Bonuses

Pros and Cons of Cash Back Credit Cards

When you consider a cash back card, again consider potential disadvantages in addition to benefits.
On the plus side, cash back cards typically don’t come with steep annual fees. You can redeem your rewards for cash that you can use for any purpose, and the amount you earn is fixed — the value or your reward doesn’t vary by date or other factors as it might with a miles card.

On the other hand, the amount of cash you can earn may be limited, and these cards may not offer many other perks. Cash back cards also typically don’t come with credit card sign-up bonuses that are as big as those offered by miles and points cards, marking another difference between cash back vs. miles cards.

Recommended: Tips for Using a Credit Card Responsibly

Pros of Cash Back Credit Cards Cons of Cash Back Credit Cards
Usually have no annual fees. May offer lower sign-up bonuses.
Rewards can be redeemed for cash. Cash back cards may offer fewer perks.
The value of your reward is fixed. The amount you can earn may be limited.

Similarities Between Cash Back and Points and Miles Credit Cards

Both cash back and points or miles cards offer you rewards based on your spending, and they may offer higher rewards for spending in certain categories. Be aware that some rewards have expiration dates, as well.

Rewards cards often carry higher-than-average interest rates. As a result, you’ll want to make sure that you will be able to pay off your credit card bill on-time and in full when you use your card, given how credit cards work when it comes to interest.

Recommended: What is the Average Credit Card Limit

Differences Between Cash Back and Points and Miles Credit Cards

The main difference between a cash back credit card vs. miles and points card is how you redeem your rewards. With cash back cards, you received a percentage of your spending, sometimes limited to a maximum amount. You earn points and miles in a similar way. However, their value may change and you may be limited in where you can redeem them.

If you have a co-branded miles card for example, you may only be able to use your miles with that airline. Cards that aren’t co-branded may offer you the chance to redeem points and miles with a variety of companies, such as airlines and hotel brands.

Similarities Between Cash Back and Points and Miles Credit Cards Differences Between Cash Back and Points and Miles Credit Cards
Offer rewards based on spending. Cash back card rewards are redeemed for cash.
May offer greater rewards for spending in certain categories. Points and miles allow you to redeem rewards toward purchases.
Typically has a higher interest rate. Points and miles cards may limit where you can redeem your rewards.

Recommended: How to Avoid Interest On a Credit Card

Is It Better to Get Cash Back or Miles?

Whether or not you choose a cash back card vs. a miles or points card will depend on how much you travel. Travel cards tend to offer better value when you redeem points and miles for travel-related rewards. So if you’re a big traveler, one of these cards may be right for you. However, if you’re more of a homebody, a cash back rewards program may be a better fit.

Other Credit Card Rewards

Cash back or travel rewards isn’t your only choice. There are a variety of other credit card rewards programs you may encounter.

Gas Rewards

Gas cards are typically co-branded with certain gas vendors. Users usually earn points and discounts only on gas purchases. In general, gas cards have relatively high rates of return and don’t charge an annual fee.

Retail Credit Cards

Credit cards that are co-branded with major retail outlets will often offer discounts at that outlet. Rewards might be applied at the point of sale or as regular statement credits.

The Takeaway

Understanding how credit cards allow you to redeem rewards — and how useful those rewards are — is key to deciding which card is right for you. If you’re a world traveler, a miles card might fit the bill. And if you don’t fly frequently, you may be better served by earning cash back on purchases you make in your day-to-day life.

Shop around for the credit card that best suits your needs. A credit card from SoFi offers 2% unlimited cash back rewards and charges no foreign transaction fee. Cardholders earn 1% cash back rewards when redeemed for a statement credit.1

The SoFi Credit Card offers unlimited 2% cash back on all eligible purchases. There are no spending categories or reward caps to worry about.1



Take advantage of this offer by applying for a SoFi credit card today.

FAQ

What is the difference between cash back and miles?

Cash back cards allow you to earn back a percentage of the purchases you make. Miles cards allow you to earn miles based on the purchases you make, which you often must use toward airline travel.

Is cash back really worth it?

Cash back rewards can allow you to earn some money back from your everyday spending. However, you’ll want to make sure you can pay off your balance in full each month, as rewards cards that offer cash back tend to have higher interest rates than non-rewards credit cards.

Can you convert miles to cash?

Some cards allow you to convert miles to cash, but users will get the most value from redeeming miles for travel. You can find out whether your card allows you to convert miles to cash by calling your credit card issuer. Find their number on the back of your credit card.

Do cash back or credit card miles have higher interest rates?

Both cash back and travel rewards credit cards tend to have higher interest rates as they’re types of rewards credit cards. In general, rewards credit cards usually have higher interest rates than no-frills cards that don’t offer rewards.


Photo credit: iStock/franckreporter

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

The SoFi Credit Card is issued by SoFi Bank, N.A. pursuant to license by Mastercard® International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

SoFi cardholders earn 2% unlimited cash back rewards when redeemed to save, invest, a statement credit, or pay down eligible SoFi debt.

1See Rewards Details at SoFi.com/card/rewards.

Members earn 2 rewards points for every dollar spent on purchases. No rewards points will be earned with respect to reversed transactions, returned purchases, or other similar transactions. When you elect to redeem rewards points into your SoFi Checking or Savings account, SoFi Money® account, SoFi Active Invest account, SoFi Credit Card account, or SoFi Personal, Private Student, or Student Loan Refinance, your rewards points will redeem at a rate of 1 cent per every point. For more details, please visit the Rewards page. Brokerage and Active investing products offered through SoFi Securities LLC, Member FINRA/SIPC. SoFi Securities LLC is an affiliate of SoFi Bank, N.A.

1Members earn 2 rewards points for every dollar spent on purchases. No rewards points will be earned with respect to reversed transactions, returned purchases, or other similar transactions. When you elect to redeem rewards points into your SoFi Checking or Savings account, SoFi Money® account, SoFi Active Invest account, SoFi Credit Card account, or SoFi Personal, Private Student, or Student Loan Refinance, your rewards points will redeem at a rate of 1 cent per every point. For more details please visit the Rewards page. Brokerage and Active investing products offered through SoFi Securities LLC, member FINRA/SIPC. SoFi Securities LLC is an affiliate of SoFi Bank, N.A.

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What Is a Liquidity Pool in Cryptocurrency?

What Is a Liquidity Pool in Cryptocurrency?

A liquidity pool is a collection of cryptocurrency funds grouped into a smart contract. This smart contract provides users of decentralized exchanges (DEXs) with access to liquidity for their trades. Rather than traditional order books containing buy and sell orders, most DEXs use automated market makers (AMMs) to facilitate trades automatically via liquidity pools.

Continue reading this crypto guide to learn about the innovation of liquidity pools and their various use cases.

How Crypto Liquidity Pools Work

Liquidity pools offer incentives to investors in exchange for locking up tokens in the pool. Most often, incentives come in the form of trading fees from the exchange that utilizes the pool. When someone provides liquidity to a pool, they might gain a liquidity provider (LP) token for doing so. The tokens themselves can be valuable, but also have other functions inside the decentralized finance (DeFi) ecosystem.

Those who provide liquidity typically receive a number of LP tokens proportionate to the amount of funds they have given to the pool. Each time a trade is facilitated using that pool, a portion of the trading fee is divided up and given to those who hold LP tokens.

When someone buys a token on a decentralized exchange, they aren’t buying from a seller in the same way that traditional markets work. Instead, the trading activity is handled by an algorithm that controls the pool. AMM algorithms also maintain market values for the tokens they hold, keeping the price of tokens in relation to one another based on the trades taking place in the pool.

The finer points of just how liquidity pools work is a highly technical topic that branches out into numerous subtopics , which are worth taking the time to understand.

The Importance of Crypto Liquidity Pools

In the beginning, DEXs often had liquidity problems. They tried to mimic traditional exchanges with order books, and this didn’t work very well. At some point, the invention of a liquidity pool was introduced, giving users an incentive to provide liquidity and removing the need to match buyers with sellers using an order book.

This one change helped enable DeFi’s explosive growth of over the last several years, as it gave decentralized exchanges a way to provide liquidity using crowdfunded pools and algorithms.

Purpose of Liquidity Pools in DeFi

The main purpose of a liquidity pool in DeFi is to facilitate transactions without a centralized third party. Through the use of automated market makers (AMMs) and liquidity pools, trades can be executed automatically thanks to the pool. There’s no need for order books containing countless buy and sell orders.

Liquidity pools can also be used for a variety of other purposes, which include:

•   Tranching: dividing up financial products according to risk/reward profiles;

•   Minting synthetic assets, and

•   Providing insurance against smart contract risks.

Another use of liquidity pools involves what’s known as yield farming, which we’ll explain in more detail shortly.

Liquidity Pool Comparisons

What is a liquidity pool in comparison to other, similar DeFi alternatives?

Yield farming is a practice involving the use of multiple liquidity providers in a way that can maximize yield. Staking crypto works much the same way as participating in a pool, although the process may be different.

Liquidity Pools vs Yield Farming

Some DeFi platforms offer additional incentives for users to lock up tokens in the pool. This can be done by providing more tokens for special “incentivized” pools. Being a participant in these pools and getting as many LP tokens as possible is known as liquidity mining.

With a variety of different platforms and liquidity pools available, it can be difficult to determine where the best place to put one’s crypto might be. Yield farming involves locking up tokens in different DeFi apps in such a way as to maximize potential rewards.

Some platforms, like Yearn.finance, can automatically move user funds to different DeFi protocols in accordance with a user’s preferred risk tolerance and desired reward.

Liquidity Pools vs Staking

Staking and using a liquidity pool function in much the same way. In both cases, users lock up tokens and earn rewards. But what’s going on “under the hood” is a much different story.

While liquidity pools are a function of decentralized finance, staking simply involves dedicating tokens to a particular proof-of-stake (PoS) network. Holders of PoS tokens cam elect to lock up some of their funds to help validate transactions on the network. In exchange, they get a chance to earn the next block reward of newly minted coins.

Potential Benefits and Risks of Liquidity Pools

It’s important to look at the risks and benefits when trying to answer the question “what is a liquidity pool.” In general, the risks are numerous, and the big benefit comes in the form of substantially higher yields than those in most traditional markets.

Potential Benefits

The main benefit of crypto liquidity pools is the potential to earn a yield on crypto that would otherwise be idle. With interest rates at historic lows, some investors have begun looking beyond traditional products like certificates of deposit (CDs), Treasury bonds for yield. There are stories of people achieving astronomical yields on their crypto with various DeFi products, although there are just as many stories of people who’ve invested in crypto products and lost everything.

Potential Risks

DeFi might be among the riskiest ventures in crypto. The smart contracts that underlay these platforms sometimes have exploitable bugs in them. Because of the large profit opportunity, these protocols have become a prime target for hackers.

In addition to hacks, some DeFi projects have proven to be outright scams from the start. A “rug pull” is a common type of scam in this area. Rug pulls involve developers creating a project, attracting investor funds, and then shutting down operations while making off with everything people had deposited. Consumers often have no legal recourse in these cases, and tracking down the perpetrators can be difficult, if not impossible.

Investing in DeFi products that use crypto liquidity pools involves the potential for total loss of principal.

The Takeaway

The answer to the question “what is a liquidity pool” gets complicated in terms of the technical aspects. In a nutshell, liquidity pools are crowdfunded pools of crypto used to facilitate trades and perform other functions in DeFi. This method of financing operations has made possible a number of innovative decentralized financial services.

FAQ

What does a liquidity pool do?

A liquidity pool provides liquidity for decentralized exchanges. Most often, liquidity pools are used to facilitate trades in a decentralized manner, although liquidity pools can also be used for other purposes like insurance, tranching, or minting synthetic assets.

How do liquidity pools make money?

Those who provide liquidity to liquidity pools receive tokens that divvy out rewards that come from trading fees. The rewards are proportional to the amount of value locked into the protocol.

How do you participate in liquidity pools?

Participating in crypto liquidity pools requires participating in decentralized finance. This typically involves creating an account on a decentralized exchange, exchanging a token you have for an LP token, and locking up the token in the platform. Most platforms have simple user interfaces that guide users through the process.


Crypto: Bitcoin and other cryptocurrencies aren’t endorsed or guaranteed by any government, are volatile, and involve a high degree of risk. Consumer protection and securities laws don’t regulate cryptocurrencies to the same degree as traditional brokerage and investment products. Research and knowledge are essential prerequisites before engaging with any cryptocurrency. US regulators, including FINRA , the SEC , and the CFPB , have issued public advisories concerning digital asset risk. Cryptocurrency purchases should not be made with funds drawn from financial products including student loans, personal loans, mortgage refinancing, savings, retirement funds or traditional investments. Limitations apply to trading certain crypto assets and may not be available to residents of all states.

Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.

Disclaimer: The projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.
SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by email customer service at [email protected]. Please read the prospectus carefully prior to investing.
Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.



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Income Investing Strategy

Income Investing Strategy

Building wealth is the goal for nearly all investors, but there are different ways to go about it. For some, investing is about finding assets that will rise in price, leading to substantial capital gains. For others, receiving regular income streams from a portfolio of investments is ideal. Focusing on generating steady investment income is known as an income investing strategy.

Investors might be interested in income investing for various reasons. Some investors want to create an additional income stream during their working years. Other investors may focus on generating monthly income during retirement. Whatever reason investors may have for choosing an income investing strategy, it’s important to understand how it works.

What Is Income Investing?

An income investing strategy is an approach to investing that focuses on generating income rather than capital gains. Income investors typically seek out investments that provide a regular income stream, such as dividends from stocks, interest from bonds, or rental payments from a property.

Income investing can be a way to generate a passive income stream that supplements labor and retirement income.

Types of Income Investing

There are several income investing strategies that investors can adopt, depending on their goals and preferences. Common approaches include investing stocks that pay regular dividends, bonds, and real estate.

1. Dividend stocks

Dividend stocks are stocks that pay out regular dividends to shareholders. Companies usually pay dividends quarterly, and they can provide a reliable source of income for investors. Income investors are generally attracted to companies that pay out reliable dividends, like the companies in the S&P 500 Dividend
Aristocrats
index. Companies in this index have increased dividends every year for the last 25 consecutive years.

One metric that income investors should consider is the dividend yield. A stock’s dividend yield indicates how much the company annually pays out in dividends to shareholders, typically expressed in a percentage of its share price.

While a high dividend yield might be attractive to some investors, risks are also associated with high yield investments. Investors who want regular and consistent income tend to avoid stocks that pay high yields in favor of dividend aristocrats that may pay lower yields.

💡 Recommended: Living off Dividend Income: Here’s What You Need to Know

2. Bonds

Bonds are a debt instrument that normally pays periodic interest payments to investors. Also known as fixed-income investments, bonds are typically less risky than stocks and can provide a steady stream of income. The bond’s yield or interest rate determines the interest income payment.

There are various bonds that fixed-income investors can consider. For example, government bonds are debt securities issued by a government to support government spending and public sector projects. Government bonds — like U.S. Treasuries and municipal bonds — are generally less risky than other types of bonds and can provide tax-advantaged income and returns.

Investors can also lend money to businesses through corporate bonds, which are debt obligations of the corporation. In return for money to fund operations, companies pay periodic interest payments to investors. Corporate bonds carry a relatively higher level of risk than government bonds but also provide higher yields.

However, not all bonds offer yield to investors interested in generating regular income. These bonds, called zero-coupon bonds, don’t pay interest at all during the life of the bond. The upside of choosing zero-coupon bonds is that by forgoing annual interest payments, it’s possible to purchase the bonds at a deep discount to par value. This means that when the bond matures, the issuer pays the investor more than the purchase price.

💡 Recommended: How to Buy Bonds: A Guide for Beginners

3. Real estate

Real estate may be a great source of income for investors. Rents paid by tenants act as a regular income payout. It also offers long-term price growth, in addition to some tax benefits.

There are several ways to invest in real estate, including buying rental properties and investing in real estate investment trusts (REITs).

💡 Recommended: Pros & Cons of Investing in REITs

4. Savings accounts

Savings accounts are a safe and easy way to earn interest on cash. Savings accounts and other cash-equivalent saving vehicles like certificates of deposits and money market accounts typically offer low-interest rates. However, because these interest rates are usually much lower than the inflation rate, inflation eats away at the value of the money in these savings accounts. Still, they are a low-risk way to earn income.

5. Mutual funds and ETFs

Investors who don’t want to pick individual stocks and bonds to invest in can always look to mutual funds and exchange-traded funds (ETFs) that have an income investing strategy. There are many passively and actively-managed funds that invest in a basket of securities that provide interest and dividend income to investors. These funds allow investors to diversify their holdings by investing in a single security with high liquidity.

Example of an Income Investing Portfolio

When building a portfolio for any investing strategy, investors must consider their financial goals, risk tolerance, and time horizon. For income investors, it’s important to include a range of income sources by diversifying holdings. It may also be beneficial to utilize mutual funds and ETFs to get exposure to certain asset classes.

A potential portfolio for an investor with a lower risk tolerance may look like this:

Example Asset Mix of an Income Investing Portfolio

Asset type

Percent of holdings

Bonds (government and corporate) 60%
Dividend stocks 25%
Rental property or REITs 10%
Cash (savings account, money market account, and CDs) 5%

(This is an illustrative portfolio and not intended to be investment advice. Nor is it a representation of an actual ETF or mutual fund. Please consider your risk tolerance and investment objective when creating your investment portfolio.)

Benefits and Risk of Income Investing

Like any investing strategy, there are both advantages and drawbacks to focusing on earning income through investments.

Benefits

The potential benefits of income investing include receiving a steady stream of payments, which can help to smooth out fluctuations in the market. Also, the price of some dividend-paying stocks and real estate may be less volatile than other assets, like growth stocks, which can help capital preservation and total return over the long term.

Risks

Investors who are pursuing an income investing strategy should understand the risks involved. In particular, they should be aware that investments that offer high yields may also be more volatile. The income from these investments may be less predictable than from more established investments, like blue chip stocks that pay out consistently reliable dividends. For example, a company with a high dividend yield may not be able to sustain that kind of payout and could suspend payment in the future.

When investing in bonds, investors need to know about the potential risks associated with fixed-income assets:

•   Credit risk is when there is a possibility that a government or corporation defaults on a bond.

•   Inflation risk is the potential that interest payments do not keep pace with inflation.

•   Interest rate risk is the potential of fixed-income assets fluctuating in value because of a change in interest rates. For example, if interest rates rise, the value of a bond will decline.

Additionally, if investors take the income from their investment for day-to-day needs, they may miss out on the benefits of compound interest. Investors could reinvest the income they earn on certain investments to take advantage of compounding returns and accelerate wealth building.

Factors to Consider When Building Your Income Investing Strategy

Building an income investing strategy takes work and time. Before creating a portfolio, you need to define your financial goals and consider your timeline for when you need the income streams. Below are some additional steps you could follow to create an income investing strategy:

•   Assess your risk tolerance: It’s important to determine whether you want to invest more heavily in riskier assets, like dividend-paying stocks that may fluctuate in share price, or relatively safer securities, like interest-paying bonds.

•   Choose your investments: As mentioned above, potential options for income investors include bonds, dividend stocks, and real estate investment trusts (REITs).

•   Monitor your portfolio: It’s critical to regularly check in on your investments to ensure they are still performing according to your expectations.

•   Rebalance as needed: If your portfolio gets out of alignment with your goals, consider making adjustments to get it back on track.

The Takeaway

When most people think of investing, they think of finding the next Amazon or Google, investing in the stock early, and hoping they see substantial share price appreciation. However, that’s not the only way to build wealth through investing.

An income investment strategy is another way to achieve financial peace of mind. Investing in dividend-paying stocks, interest-paying bonds, and other assets allows you to get the benefits of regular income streams and potential capital appreciation, not just the hopes of striking it big on growth stocks.

Ready to try your hand at investing in stocks, ETFs, and earning dividends? An investment account with SoFi Invest® allows you to trade stocks and ETFs with no commissions or participate in upcoming IPOs before they trade on the public market. Plus, fractional shares mean you can buy a piece of your favorite companies for as little as $5.

Ready to learn how investing could help you meet your financial goals? Check out SoFi Invest today.

FAQ

What’s the difference between income investing and growth investing?

Income investing is focused on generating regular cash flow through dividends, rent, or interest payments, while growth investing is focused on capital appreciation.

What is the best investment for income?

There is no single best investment for income. Income-producing investments include stocks, bonds, and real estate. Each has different characteristics, so it is important to consider risk tolerance, liquidity needs, and investment objectives when choosing an investment.

Is income investing a good idea?

Income investing may be a good idea for investors looking for a way to generate regular income from their investments. Additionally, income investing can be a good way to diversify one’s portfolio and reduce overall portfolio risk.


SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.


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What Is A Hostile Takeover?

What Is A Hostile Takeover?

A hostile takeover is when one company tries to obtain another company through hostile or unfriendly means. This can include a tender offer, where the hostile company makes an offer to buy the other company’s shares directly from shareholders, or a proxy fight, where the hostile company tries to replace the other company’s board of directors.

The machinations of hostile takeovers may seem remote for regular investors. However, if you own shares of the companies involved, the outcomes of a takeover can be important for short- and long-term stock price movements.

How Hostile Takeovers Work

A hostile takeover is a type of legal acquisition in which a bidder — either another company or an investor — tries to purchase a target company without the approval of the target company’s board of directors. Hostile takeovers are often characterized by aggressive tactics such as proxy fights, tender offers, and open letters to shareholders.

In a hostile takeover, the bidder seeks to acquire a majority stake in the target company without the approval of the target’s board of directors. This aggressive action contrasts with typical acquisitions, where two companies work together to agree on a deal, and the board of directors of the target company approves of the purchase.

Hostile takeovers happen when a target company’s management refuses initial takeover offers, but the bidding company is persistent in its efforts to acquire the company.

There are many reasons why a company or investor may try to take over another company. Sometimes it is because the stock market undervalues the target company’s shares, and the bidder believes that they can increase the company’s value. Other times, it may be because the bidder wants the target company’s assets, brand recognition, or market share.

If the company making the hostile takeover successfully acquires a majority of the shares, then it can gain control of the target company. Once in power, the acquiring company can make changes to the target company’s management, strategy, and operations. In some cases, the company making the hostile takeover may take steps to increase the value of the company, such as selling off non-core assets, cutting costs, or increasing investment in research and development.

Hostile Takeover Strategies

There are a few ways a company may pursue a hostile takeover. Sometimes a bidder may try to buy a significant percentage of shares of the target company on the open market, hoping to gain enough voting power to persuade the board of directors to accept a takeover offer. If that doesn’t work, the bidder uses its voting power to change management.

💡 Recommended: Explaining the Shareholder Voting Process

The bidder may also take aggressive measures, such as making open letters to shareholders or launching a public relations campaign to pressure the target company’s management to accept the offer. The most common hostile takeover tactics include:

•   Tender offers: A tender offer is when the bidding company reaches out directly to the target company’s shareholders, offering to purchase shares — usually at a premium to the current market value. The bidder pursues a tender offer to bypass a company’s leadership and get enough shares to have a controlling stake in the company. Each shareholder can then decide if they want to sell the stake in the company.

•   Proxy fights: A proxy fight is a battle between competing groups of shareholders to gain control of a company. In a hostile takeover, a bidder, which usually owns a portion of the target company’s stock, tries to persuade other shareholders to vote out the target company’s management. This may allow the bidder to replace the board of directors and seize control of the company.

Examples of Hostile Takeovers

A hostile takeover usually starts when the acquiring company makes an unsolicited bid to purchase the target company. If the board of directors of the target company doesn’t approve of the proposal, they may reject the offer. The acquiring company then will pursue a hostile takeover bid by going directly to the shareholders or trying to replace the board of directors.

However, hostile takeovers don’t usually reach this conclusion. The target companies may defend themselves, causing the bidding company to drop the takeover attempt. Or the target company’s board of directors will relent and eventually agree to terms on an acquisition.

Sanofi’s Acquisition of Genzyme

The French healthcare company Sanofi (SNY) attempted a hostile takeover of the American pharmaceutical firm Genzyme in 2010. Before the hostile bid, Sanofi’s management made several friendly offers to buy Genzyme, but the American company’s management declined. As a result, Sanofi courted shareholders to gather support for a deal and made a tender offer. This put pressure on Genzyme management to finally accept a deal, which they did. Sanofi bought Genzyme for $20.1 billion in 2011.

Kraft Foods’ Takeover of Cadbury

Kraft Foods (KHC), an American food company, launched a hostile bid for Cadbury, a UK-based chocolate company, in 2009. The hostile takeover was motivated by Kraft’s desire to increase its market share in the global confectionery market and acquire Cadbury’s valuable portfolio of brands. Cadbury’s management opposed the takeover and put together a hostile takeover defense team. Also, Cadbury shareholders and the UK government opposed the deal. However, Kraft was ultimately successful in acquiring Cadbury, and the takeover was completed in 2010 for $19.6 billion.

Oracle’s Purchase of PeopleSoft

Oracle (ORCL), the computer software and technology company, launched a hostile takeover of PeopleSoft in June 2003. PeopleSoft attempted to defend itself from the takeover, enacting a poison pill provision. However, Oracle made a tender offer to PeopleSoft shareholders, and nearly 60% of shareholders agreed to sell. PeopleSoft management thus relented, agreeing to sell the company to Oracle for $10.3 billion.

How Can Companies Defend Against Hostile Takeovers?

Companies can deploy various strategies to defend against a potential or imminent hostile takeover. These defensive plans are intended to make the hostile takeover more difficult, expensive, or less attractive to the bidder.

Poison Pill

Companies may adopt a shareholder rights plan, more commonly known as a poison pill, to protect themselves from a hostile bidder. With a poison pill, the target company’s shareholders have the right to purchase additional shares at a discount if a hostile takeover attempt is made, diluting the ownership of the existing shareholders. This makes it more expensive for the acquirer to buy a controlling stake in the company and often deters hostile takeover attempts altogether.

Golden Parachute

A golden parachute is a hostile takeover defense where the target company offers its top executives large severance packages if another firm takes over the company and the executives are terminated due to the acquisition. This makes the purchase more expensive and unattractive for a potential buyer.

Pac-Man Defense

A Pac-Man defense is an offensive strategy employed by a target company in a hostile takeover attempt. A Pac-Man defense refers to a target company that fights back against a hostile bidder by launching its own takeover bid for the bidder.

How Hostile Takeovers Affect Investors

A hostile takeover can significantly affect investors who own shares of either the target or bidding company, causing uncertainty in short- and long-term stock market prospects.

In the short term, investors who own shares of the competing companies may see share prices rise or fall, depending on whether the markets view the proposal as a good or bad deal.

💡 Recommended: Understanding Market Sentiment

The target company’s management may also make the company less attractive to a bidder, such as by adopting poison pill provisions or increasing debt levels. These tactics may increase costs and debt burdens, which may negatively impact the long-term outlook for the company.

However, the target company’s share price may be positively affected as the hostile company tries to buy the target company’s shares at a premium.

If the hostile takeover is successful, the investors in the target company may see a change in the management of the company, as well as a potential change in the company’s strategy. This may change the long-term outlook for the company, which may be bullish or bearish for investors.

On a macro level, a hostile takeover can also affect the industries in which the target company and bidder operate. If the hostile takeover is successful, the industry may see a consolidation of companies, affecting market competition and share prices of related firms.

The Takeaway

The term hostile takeover evokes an image of corporate raiders and a feeling of the 1980s, when the strategy first became popular. However, hostile takeovers, while rare, continue to this day.

Investors may hear about these hostile takeover bids in the financial press, causing them to wonder how it all affects them and their portfolios. There is no definitive answer, however. In some situations, the stocks of the companies involved may go up, and the stocks may go down in other situations. In the end, it’s essential to monitor the news of the deal carefully and pay attention to price fluctuations in the market.

With the SoFi app, you can monitor your portfolio and keep track of the latest market news, so you can keep up on the latest details of takeover events. Additionally, you can trade stocks online with SoFi Invest® with as little as $5.

Build your portfolio with SoFi Invest


SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.


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