Building an Income Portfolio: 5 Steps to Cash In Now

Income Portfolio Strategies That Work At Any Age

Today’s article is about building an income portfolio for monthly income.

Whether you are a young working-age adult, stay-at-home parent, or retired; investing for income is a popular strategy.

So today, I’m going to show you exactly how to build an income-producing portfolio. Complete with an income portfolio example. That will generate $1,000 per month in income.

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For an overview, let’s first look at the 5 steps.

Building An Income Portfolio: 5 Step Plan

  1. Determine the required monthly income from your portfolio
  2. Choose a target portfolio yield
  3. Pick the types & mix of investments
  4. Determine the investment required to achieve your monthly income goal
  5. Invest new funds & reinvest the income from your portfolio regularly

You can build an aggressive income portfolio. Focused on high income.

Or, choose a defensive portfolio. For more conservative investors.

Today, we will play it down the middle. Being balanced with our investment choices. And asset allocation.

We will get into the details in a moment. But first, let’s set an income portfolio definition. To make sure we are all on the same page about today’s topic.

Disclosure: At no cost to you, I may get commissions for purchases made through links in this post.

What Is An Income Portfolio?

Portfolio income includes interest, dividends, or capital gains.  It is derived from investments or money lent.

Therefore, an income portfolio is any combination of investments, loans, real estate, or securities. They are grouped by an investor. With the objective of generating income from interest, dividends, and capital gains for the owner.

With that definition of an income-producing portfolio in mind, let’s dive into each of the 5 steps.  So when we are done, you will know exactly how to make money investing.

And be able to get busy building an income-generating portfolio. From a group of productive investment assets.

1. Determine The Required Monthly Income From Your Portfolio

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Every smart money management activity should start with a goal. For step 1, ask yourself how much monthly income you would like to generate from your income-producing portfolio.

Every person reading this article has different financial needs. So, that makes it hard for me to tell you what your goal should be. But, I can help you think about it.

To determine your unique goal for monthly income from your portfolio, consider these investing tips and questions…

What will the income be used for? Will it be used for covering expenses? Then how much are your essential expenses each month?

When will the income be needed? The shorter your time horizon, the lower your monthly portfolio income goal should be.  On the other hand, do you have a long time until you will need the income?

Then your goal can be higher. Because you have the time to build a high-income investing portfolio.

For this article. I am going to choose a goal. And use it for building an income portfolio example. The goal is to make $1,000 per month in portfolio income.

You can learn more about calculating investment income here.

Now that we have our goal established. Let’s move to step 2 in our plan for building a monthly income portfolio.

2. For Building An Income Portfolio Choose A Target Portfolio Yield

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Your next step is to choose a portfolio yield target. Investment yields can vary widely. They can range from less than 1% to more than 10%.

For today’s income portfolio example, I am going to play it down the middle. And choose a 5% target portfolio yield.

To make your decision, you may need a little more knowledge and information.  Here are a couple of things to consider.

What Is Portfolio Yield?

Each income investment has a yield. And the investments you choose will combine to form your portfolio’s average yield. I will show you how to make the calculation a little later.

Yield means the percentage of the amount invested and returned annually back to the investor in cash.  For example, invest $1,000 at a 3% yield and get $30 of annual income.

Sometimes yield is referred to as the interest rate or just rate for short. In the case of dividend stocks, it is referred to as dividend yield. For real estate investments, the income may be referred to as rents.

What Can An Portfolio’s Yield Tell Us?

Except for the best productive physical assets like real estate, portfolio yield can be an indicator of investment risk. Generally, higher yields mean greater risk. And when I say risk, I am talking about the possibility of losing money on an investment.

Nothing can blow a hole in an income-producing portfolio faster than taking too much risk. And losing money on a big investment holding.

Keep in mind that as you take more risk, you should have a longer time horizon for the money you are investing.  For example, if you need the money in 6 months to pay essential expenses, then take less risk.

On the other hand, if you need the money in 30 years for retirement. Then you can consider taking more risk. Because you have time to recover from an investment gone bad.

Why Is Portfolio Yield Important?

Portfolio yield is important for two more reasons beyond investment risk. First, in combination with your monthly income goal, the portfolio yield tells you how much investment is required to achieve that goal.

Secondly, when building an investment portfolio, the yield will influence your decisions on the types and mix of investments that you make.

The topic of investment types leads us to step 3 in building an income portfolio…

3. To Start Building An Income Portfolio, Choose The Types & Mix Of Investments

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There are many examples of income-producing assets.  Here are several investment ideas for your consideration:

Income Investments: Savings Products

A certificate of deposit (CD) is a savings certificate with a fixed maturity date and a specified interest rate.  Most CDs have minimum investment requirements. 

Savings accounts have some similar characteristics to CDs.  However, unlike CDs, they have no minimum holding period.

US savings bonds are low-risk savings products that pay interest for up to 30 years.  Savings bonds are issued by and backed by the credit standing of the US government.

Money market accounts are another type of savings product.  They are comprised of very short-term, high-quality investment securities.

Income Investments: Bonds and Loans

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State and local governments borrow money by issuing municipal bonds to fund their operations.  For-profit companies issue corporate bonds to borrow money from investors.

Peer-to-peer loans (P2P) allow individuals to obtain money directly from other individuals.  The P2P lending process cuts out traditional financial institutions as the middleman.

Income Investments: Stocks

Dividend-paying common stocks provide the investor with partial ownership in a company that pays dividends. They are also referred to as dividend growth stocks.

Preferred stocks are hybrid securities that have a mix of bond and common stock characteristics.  An investor forgoes the upside potential of common stock. But is normally compensated with a higher yield.

Real estate investment trusts (REITs) refer to a company that owns, finances, or manages income-producing real estate.  REITs issue common stock to the public that pays a dividend.

Master limited partnerships (MLPs) are a business venture that exists in the form of a publicly traded limited partnership.  Like REITs, MLPs issue common stock that pays a dividend.

Income Investments: Funds

Open-end mutual funds, closed-end mutual funds, and exchange-traded funds have different characteristics.  On the other hand, they are all similar in that they are a collection of securities.

They offer an investor immediate diversification across an asset class.  Or, diversification across multiple asset classes. And provide a much more passive way to invest for those of you who are busy.

But really. Who’s not busy all of the time.

In particular, bond and stock investments can easily be made through funds. Rather than purchasing individual securities, you can build your investment income entirely from ETFs.

Income Investments: Real Estate

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Finally, consider real estate. I already mentioned REITs. But there are other ways to generate portfolio income from real estate assets.

You can invest in rental property. But that can be a lot of work finding tenants. And maintaining the property.

So, also consider online investing services for real estate. That connect investors to borrowers who need help financing a variety of real estate projects

So now, let’s put what we have so far into a sample income portfolio.

Putting all the investment products, high-grade bonds, stocks, and more all together.

Table 1: Income Portfolio Example With Allocations To Investment Types

InvestmentYieldAllocationPortfolio Yield
High-grade bonds2%10%.2%
High-yield bonds6%25%1.5%
P2P loans8%5%.4%
Preferred stocks5%10%.5%
Dividend stocks4%30%1.2%
REITs & MLPs7%5%.35%
Real estate8%10%.8%
Total portfolio100%5%

Table 1: Notes To Investment Portfolio Example

  1. Investment yields are approximate and for example purposes only. They indicate what you might expect from each investment type. They will change based on the economic and investment environment.
  2. Income portfolio allocation is the percentage of portfolio value allocated to each type of investment.
  3. Portfolio yield is the summation of #1 x #2 for each investment type or 5% in this example.
  4. The example portfolio will generate all three types of investment income.

And just 1 more point to consider before moving on.  Not all investments will pay monthly.

So if making exactly $1,000 per month (or whatever your number) is important to you, check the investments payment frequency. Or, during lower-income months, consider selling assets that have appreciated in value to generate the extra income necessary to meet your monthly goal.

Now we are ready for step 4 in our plan for building an income portfolio for retirees or whatever your goal is.

4. Determine The Investment Required When Building An Income Portfolio

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Here is what we know so far. First of all, in step 1 we established a goal of $1,000 per month of income from our investment portfolio.

Furthermore, step 2 had us choose a target portfolio yield. We are using 5% in this example.

Finally, in step 3 I selected a mix of investment types. I chose several different types of investments for diversification. Also, investments that will produce a portfolio income yield of 5%.

So, how much investment is required to generate $1,000 a month from this investment portfolio?  Here is the calculation:

  1. Calculate annual income by taking $1,000 a month times 12 months. That equals $12,000
  2. Divide $12,000 by our 5% portfolio yield. Giving us $240,000.

So, to generate $1,000 per month in portfolio income. You need to save and invest $240,000.

Using the example income portfolio allocations from table 1. Here is what your finished portfolio will look like in dollar terms.

Table 2: Sample Income Portfolio

InvestmentYieldAllocationPortfolio Yield
High-grade bonds2%$24,000$480
High-yield bonds6%$60,000$3,600
P2P loans8%$12,000$960
Preferred stocks5%$24,000$1,200
Dividend stocks4%$72,000$2,880
REITs & MLPs7%$12,000$840
Real estate8%$24,000$1920
Total portfolio$240,000$12,000

Realize that the table above is the finished product.  The resulting investment portfolio to achieve your monthly portfolio income goal.  You will build to this over time.

And it will take time. So use the 5 steps and get started investing today.

Before we move on, we can apply this same thought process. To understand the amount of investment required to generate different monthly income goals. Because you may be asking yourself these questions…

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How Much Do I Need To Invest To Make $500 A Month?

To get $500 a month, you would potentially need to invest $120,000. Certainly, a well put together income-producing portfolio can deliver this.

Here is the calculation: $500 a month times 12 months equals $6,000 of annual income. $6,000 divided by an average portfolio yield of 5% gives us $120,000.

How Much Do I Need To Invest To Make $2,000 A Month?

For $2,000 per month in desired income, you need to have $480,000 saved. Investments of this size can help your savings last through a lengthy period.

Here is the calculation: $2,000 a month times 12 months equals $24,000 of annual income. $24,000 divided by an average investment portfolio yield of 5% gives us $480,000.

How Much Do I Need To Invest To Make $3,000 A Month?

Let’s say your goal is $3,000 a month from an income-generating portfolio. Then you will need to save and invest $720,000.

Here is the calculation: $3,000 a month times 12 months equals $36,000 of annual income. $24,000 divided by an average yield of 5% gives us $720,000.

Does that sound like a lot of money to save and invest? Well, it is.

No matter what your monthly income goal. Here is how you can make your number smaller. And get to your goal more quickly…

Revisiting Investment Types & Portfolio Yield

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Let’s say, you decide to move your target yield up to 6% (or higher).  Because you have decided to invest in income-generating assets that have higher yields.

How do you do that? The answer is to change your mix of investments. Target fewer dollars to low yield investments. And move that money to higher yield investments.

Using our original example: $1,000 a month from portfolio income. A 6% dividend yield means you only need to save and invest $200,000 to earn $1,000 per month in income.

Here is the calculation: $1,000 a month times 12 months equals $12,000 of annual income. $12,000 divided by an average yield of 6% gives us $200,000.

Just remember, higher yields can signal higher investment risk.  From an investor’s perspective, higher risk means a greater likelihood of losing money on an investment.

And losing money is a big bump in the road to building an investment income. But I think you get the idea.

Go through steps 1, 2, and 3 again. Play with the assumptions. By asking yourself these questions.

How much monthly income do I want? What is my target portfolio yield? How can I adjust the mix of investments to achieve my goal?

To use a fancy term. This is known as an iterative process. Go through the process several times to get the result you want. Make the choice to be an income investor!

And now it’s time for our 5th and final step. For building a portfolio of income investments.

5. Invest & Reinvest Regularly When Building An Income Portfolio

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Step 5 in our plan may be the toughest of them all.  Why is that?

Because making the calculations and choosing investments is fairly easy.  With a little knowledge, research, and effort most anyone can do it.

Your biggest personal finance challenge may be making more money.  Also, spending less than you make. That simple equation creates excess cash for making investments.

In other words, you have to create excess cash to make the investments of your choosing. Here are some thoughts on how to go about it…

Make More Money To Accelerate Your Income Portfolio Strategy

How do you earn more money?  You do so by:

  • Investing in yourself
  • Improving your skills
  • Creating more value in your business, or for potential employers

Here’s a resource to improve your resume and find a better paying job.

Also, spend some time working a side hustle.  That can bring in some extra cash too.

Taking consumer surveys won’t change your money world overnight.  But, every little bit of extra money counts. When building a monthly income portfolio. So, I use Survey Junkie to make a little extra cash on the side.

Save More Money When To Build Up Your Portfolio Of Income Investments

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I know.  It’s no fun to scrimp and save money.   But, spending less than you make is the second part of the earn more than you spend challenge. So, I have a few tips on saving money for you

Consider how you can reduce your costs. Think about your spending on these 4 big-ticket items and look to cut your costs in these areas wherever it makes sense.

  1. Housing
  2. Transportation
  3. Food and Beverage
  4. Leisure activities

Reduce Spending

Sharpen your pencil and go through your budget with a fine-tooth comb to reduce spending.  When you achieve your goal of making monthly income off your portfolio, you will be glad you did.

Not sure where to start?  Here are a couple of suggestions that work for us.

Keep Investment Costs Low

First of all, we save on just about all our everyday online purchases through Rakuten. You can sign up with Rakuten for free here.  Also, Rakuten gives you $10 just for signing up and using their app.

Furthermore, it is a must to keep your investment costs low. So, I use the Webull app to trade stocks for free.

For an additional option, consider an IRA account.

This type of account is a great place to start your income portfolio because of its tax advantages.

Pull Your Finances Together In 1 Place

Finally, I pull all of my finances together using Personal Capital.  It allows me to see all my spending and investments in 1 place.  There is no need to keep track of multiple websites and passwords. Best of all, Personal Capital is free to sign up and use too.

Here’s another important tip. To accelerate your progress toward earning portfolio income.

Reinvest All Investment Income Received Back Into Your Income Portfolio

Make the effect of compound interest work for you. Don’t be tempted to spend the income from your portfolio. Reinvest it back into your portfolio. This will accelerate your pace to achieving your goal.

That’s your 5 steps to building an income portfolio versus a growth portfolio.  Let’s summarize the 5 steps and wrap this up.

How To Build An Income Portfolio – 5 Step Summary

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Whether you want to have an income portfolio in retirement. Or want financial freedom at a young age. Here are the 5-steps to build the best income portfolio no matter your personal and financial goals.

  1. Determine the required monthly income from your portfolio
  2. Choose a target portfolio yield
  3. Pick the types & mix of investments
  4. Determine the investment required to achieve your monthly income goal
  5. Invest new funds & reinvest the income from your portfolio regularly

More Reading On Investing For Income

My Favorite Investing And Money Management Resources

I mentioned some of my favorite resources in this article. Here they are summarized for your convenience. Best of all, they are free to sign up and give it a try.

Author Bio: Tom Scott founded the consulting and coaching firm Dividends Diversify, LLC. He leverages his expertise and decades of experience in goal setting, relocation assistance, and investing for long-term wealth to help clients reach their full potential.

Go Forth & Start Building Your Best Income Portfolio Today!