Investment Income And Portfolio Yield Calculations Explained
Today I’m going to explain how to calculate investment income.
The primary goal of income investing is to create a constant stream of income from investments. Thus, an income investor must know how to calculate investment income.
So, let’s get on with today’s topic…
Disclosure: At no cost to you, I may get commissions for purchases made through links in this post.
How To Calculate Investment Income: 3 Easy Steps
Here are the 3 steps required to calculate investment income:
- Obtain the investment’s current value
- Compute the investment’s yield
- Multiply the investment’s value by its yield (#1 x #2)
Step 3 gives us the result we are looking for. The amount of annual investment income.
In other words, multiply the investment’s value by its yield to calculate the amount of annual investment income.
Here is an example. Let’s say an income investment has a $10,000 value. Furthermore, this investment yields 3%.
To calculate investment income, simply take $10,000 and multiply it by 3%. 3% is the same as .03. So, $10,000 multiplied by .03 gives us $300 in investment income.
Investment income can be calculated for a single investment. Or, calculated as an average for an entire income portfolio.
Next, let’s break down these steps for a better understanding of the process. Then we will talk about other points to understand when calculating investment income. Including tips on retirement income investing.
Step 1: Obtain The Investments Current Value
Investment values are pretty easy to find these days. For an income investment that you do not currently own, simply look up the value online.
You can do the same for an income investment held in your income portfolio. Or, you can go to your brokerage account where the holding resides. To see its value in your account.
Step 2: Calculate The Investment Yield
Calculating the investment yield is the most challenging of our 3 steps. Allow me to explain. Then I will offer several examples.
The income that an investment provides is frequently expressed as a yield. Yield is calculated as the annual income provided by an investment. Divided by the value of the investment.
Yield is expressed as a percentage. For example, 5%. However, the percentage can be translated to a number by dividing the yield by 100.
In other words, the percentage of 5 divided by 100 equals .05.
With this definition in mind. Let’s work through some examples of calculating investment yield.
Calculating Investment Yield: Example 1-Dividend Stocks
Dividend stocks generate one of the popular types of investment income. The income they produce is also referred to as dividend income. Furthermore, a dividend stock’s investment yield is also known as a dividend yield.
Most stocks pay dividends 4 times per year. But not all dividend stocks pay on that schedule.
So, you will want to take find out how many times per year the stock pays dividends. And the amount of dividend per share each time it pays.
Here is an example of how to calculate investment yield (dividend yield) for a dividend stock:
Let’s say XYZ Company consistently follows a quarterly dividend payment pattern. And until they announce otherwise, XYZ will pay a 25 cent per share dividend every 3 months into the future.
This gives us an annual dividend rate of $1 per share. Calculated as 4 quarterly dividends per year multiplied by 25 cents.
And let’s assume XYZ stock is valued at $20 per share. So, we have a dividend yield of $1 annual dividend per share divided by $20.
Giving us a 5% dividend yield in this example. That’s how dividend yield is calculated. And a brief explanation of how dividends work.
Before we go on. Are you looking for good dividend stocks to invest in?
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Calculating Investment Yield: Example 2 – Bonds
Bonds are one of the most popular income investments. The income they produce is also referred to as interest income. Furthermore, a bond’s yield may be referred to as an interest rate or coupon rate.
Most bonds pay interest only once or twice per year. But not all bonds pay on these schedules.
So, you will want to take note of how many times per year the bond pays interest. And the amount each time it pays.
Here is an example of how to calculate investment yield for a bond:
Let’s say XYZ Company issues a bond valued at $1,000. And the bond pays interest twice per year.
Those two times a year XYZ pays the bondholder $15. Thus, the annual bond interest income is $30.
So, we have an interest rate on the bond of $30 in annual interest income. Divided by the value of the bond, $1,000.
This gives us a 3% yield on the bond. Also referred to as the interest rate for the bond.
Calculating Investment Yield: Example 3 – ETFs & Mutual Funds
Exchange-traded funds (ETFs) and mutual funds may be the most popular type of income investment.
Funds are a collection of securities offering an investor immediate diversification across an asset class. For example, an ETF that invests in bonds. Or, diversification across multiple asset classes, like stocks and bonds.
Just think about the popular income investments we have discussed thus far. Specifically, dividend stocks and bonds.
You can find an investment fund that puts them together in an income portfolio for retirement. Or for any other purpose you have.
However, different funds will each have specific investment objectives. That dictates the types and amounts of each income investment it holds.
Most importantly, funds pay the income investor dividends. And calculating the dividend yield for a fund is similar to the process I described for dividend stocks. So, I won’t go through it again.
But I want to point out a couple of important features of funds that you should know. When calculating a fund’s investment yield.
First of all, funds can pay dividends monthly, quarterly, twice per year, or annually. It depends on the fund you are looking at. Furthermore, each dividend will be different than the last dividend.
So, look back over the fund’s dividend payments for the past year. Add them up. Then divide them by the fund’s value to get its investment yield.
Okay. That’s how to work out investment yield. Next, onto step 3…
Step 3: Multiply The Investment’s Value By Its Investment Yield
All the hard work is done now. Step 3 is merely multiplying the investment’s value by its yield from steps 1 and 2.
The calculation provides our answer: investment income.
Let’s go back and make the calculations for XYZ company’s dividend stock and bond. From examples 1 and 2 above.
XYZ dividend stock had a value of $20. And a dividend yield of 5%. Thus we have an investment income of $1 ($20 multiplied by .05).
While XYZ’s bond is valued at $1,000. With an interest rate of 3%. Giving us $30 in investment income ($1,000 multiplied by .03)
So, we know how to calculate investment income for an individual investment. But what about the calculation for an entire income investment portfolio?
That’s next…
Calculating Investment Income For An Income Portfolio
Calculating the investment income for an entire income portfolio is fairly easy. Because of the nature of online access to your investments. And the transaction history that it provides.
First of all, do you need an online financial tool to pull your financial picture together in one place?
Being able to do so saves a lot of time. Furthermore, it allows for an easy portfolio analysis like I’m talking about here.
For this purpose, I like and use Personal Capital. It consolidates your budgeting, expense management, investments, and transaction history in one place.
So you only have 1 site to visit. And 1 login to manage.
Best of all Personal Capital is free to sign up and use. You can learn more about Personal Capital here.
Now, back to how to calculate investment income for a portfolio.
Example Retirement Income Portfolio
To do so, we are going to repeat the 3 steps in the same process. But this time apply the steps to an entire portfolio of income investments.
Let’s say you have been building an income portfolio for retirement. And the portfolio holds several income-producing investments.
Specifically, it has an ETF that invests in stocks that pay dividends and corporate bonds. Also several individual dividend stocks you purchased on your own. Plus a corporate bond you inherited from your late uncle.
Steps To Calculate Investment Income For An Income Portfolio
Call up your investment account online. Or, get your latest statement you received in the mail. Once again, if you have multiple accounts, Personal Capital is a great tool to consider.
Step 1: Get the total value of the account. Let’s say it’s worth $10,000.
Step 2: Next look at the dividends and interest the account has paid over the past 12 months. If you have online access, this is easy. Just perform a search to look up the transactions.
The results of your research show your account has paid $400. That is dividends and interest received during the past year.
Divide $400 by $10,000. The result is 4%. That is your portfolio’s average yield.
Step 3: Multiply the value of your investments by the yield. In this case, $10,000 multiplied by 4%.
This gives us $400 of investment income. And that is how to calculate investment income for an entire portfolio of income investments.
This leads me to an important observation about income investing…
Investment Yield Or Investment Income: Which Is Most Important?
You may have noticed that investment yield and investment income are interrelated. If you have one, you can calculate the other. Assuming you know the value of the investment (step 1).
So, you may ask. Which one is most important?
And the answer is? They are both important. However, each one tells us something different.
Investment Income
First of all, investment income represents real cash. It is the constant stream of income that investments provide.
Once the income is received it can be spent, saved, or reinvested. Most noteworthy, creating a reliable income stream is the goal of an income investor.
Furthermore, the amount of investment income received depends on 2 things. First, the portfolio’s yield. Second, the dollar value of that portfolio.
For example, 2 different people construct an income portfolio. And both portfolios yield 4%.
But one person’s portfolio is valued at $1 million. While the second person’s portfolio has a value of $10,000.
Which person will receive the most investment income?
You can probably guess the answer. It is the person with the $1 million income investment portfolio.
Even though both portfolios have the same investment yield of 4%.
Investment Yield
On the other hand, you do not receive nor can you spend investment yield. Then why is it important? Because it is a measure that helps income investors make comparisons. With the goal of maximizing investment income from a portfolio.
Regardless of the value of an individual investment. Or the income portfolio we are talking about. Investment yield is an excellent comparison tool.
For example, when comparing 2 dividend stocks. Use their dividend yield to compare and determine which one will pay you the most income per dollar invested.
Also, when comparing 2 different income portfolios. Use the average portfolio yield calculation to determine which portfolio will pay the most income per dollar invested in the portfolio.
Investment Income Vs Investment Yield
To sum up, investment income is money received. Investment yield is a tool used for comparing different income investments. Or, when comparing different income portfolios.
Higher yields mean more income per dollar invested. In other words, assuming the investment value is held constant between investment choices. Or, portfolio comparisons.
Special Considerations When Calculating Investment Income
Now that we know how to calculate investment income. Next, I want to address several topics that impact it.
Investment Income and Fund Fees
ETFs and mutual funds charge fees for managing your money. Those fees will be taken right off the top. Reducing the investment income an investor receives.
If you choose funds that are low-cost and passively managed. Then these fees are minimal. Invest in dividend stocks using a zero-commission broker and there are no costs involved.
For example, I buy and sell my dividend stocks for free. Using my Webull app.
Webull is fast and easy to use. It also has great stock research capabilities. And provides stock alerts. So, you never miss an opportunity on a dividend stock you want to buy or sell.
You can learn more about the Webull app here.
Investment Income And Taxes
Tax laws are always changing. And everyone’s tax situation is different.
But to generalize, tax rates on money made from a job, or business earnings can exceed 40% in some cases. Especially when you include social security tax on earned income. Plus state and local taxes.
On the other hand, qualified dividends are taxed at a much lower rate. The exact rate depends on your specific tax situation. And neither dividends nor interest is subject to social security taxes.
On the other hand, some amount of income tax will likely be due on your investment income. The tax rate and amount will depend on your specific circumstances.
Consult with your tax advisor. Or save money and do your taxes with tax software.
Resource: H&R Block tax preparation software
Income Investing For Retirement: Save On Taxes
Do want to reduce your taxes? Then you can save money by placing your income investments in an Individual Retirement Account (IRA).
Because IRAs are a good way to offset one of the drawbacks of income investments. That is covering the tax bill when it comes due.
There are 2 types of IRAs that you should understand…
First, there is a tax-deductible IRA. Specifically, contributions are made pre-tax.
So, you save taxes right upfront when you make your IRA contributions. But you must pay taxes on withdrawals during retirement.
Then there is a Roth IRA. In the case of a Roth, your contributions are made after tax. Thus, you do not get immediate tax savings.
But with a Roth, you never have to pay another penny of tax after that. Even when you take withdrawals in retirement. So, all of your investment income and capital gains are tax-free!
In the case of both types of IRA accounts, your money grows without being taxed. Throughout your pre-retirement years.
This is called tax deferral. And it’s a great way to accelerate growth in your retirement income portfolio.
Investment Income And Inflation
Inflation is the steady increase in prices for goods and services. Those goods and services that we consume daily.
We haven’t had high inflation over the past 10-20 years. But there is concern it will return because of massive government spending.
So, inflation can decrease the purchasing power of your investment income. This is especially true for the income from bonds. Since bond interest is fixed.
On the other hand, dividend stocks hedge or offset inflation because of dividend increases. Since it is normal for companies to increase their dividends regularly.
Thus, when prices for goods and services rise due to inflation. So do dividends. Often, by an amount more than the inflation rate.
Here’s another good way to hedge against inflation? By saving on all your online purchases.
We do so by using Rakuten to get cash rebates on everything we buy online. You can learn more about Rakuten here.
Okay. You are now armed with some important information about how to calculate investment income.
The next question many income investors vs growth investors ask is this. How to calculate monthly income from investment?
Best of all, we now know how to answer this question. So, let’s do it. By working through a couple of examples…
How Much Do I Need To Invest To Make $1,000 A Month?
To make $1,000 a month from investment income you’ll need to invest between $200,000 and $400,000.
The exact amount of money invested to create $1,000 per month from an income portfolio depends. Specifically, it depends on your portfolio’s average yield.
To put today’s lesson into practice, here are the calculations.
Investment portfolio value of $200,000 multiplied by a yield of 6% equals $12,000 of investment income per year. Broken down to $1,000 a month.
Or, an investment value of $400,000 multiplied by a yield of 3% equals $12,000 of investment income per year. Once again, $1,000 a month.
This example assumes you can build an income portfolio. With an average yield of between 3% and 6%.
Higher yields are possible. Which reduces the amount of investment required.
But, higher yields are associated with greater investment risk. Meaning you take more risk of losing some or all of your initial investment.
Perhaps accumulating $200,000 or more in an income portfolio seems out of reach? Then let’s try a different scenario for how to calculate retirement income…
How Much Do I Need To Invest To Make $500 A Month?
To make $500 a month from investment income you’ll need to invest between $100,000 and $200,000.
Once again, the exact amount of money invested will depend on your portfolio’s average yield. Similar to the prior example, an average yield of between 3% and 6% is a reasonable assumption.
To refresh our knowledge, here are the calculations.
An income portfolio value of $100,000 multiplied by a yield of 6% equals $6,000 of investment income per year. Broken down to $500 a month.
Or, an portfolio value of $200,000 multiplied by a yield of 3% equals $6,000 of investment income per year. Once again, $500 a month.
So, now you know how to calculate the investment required. To earn a specific amount of investment income each month.
Does making some extra money sound good to you? Are you ready to start or add to your income portfolio?
Then get the right tools. And be a do it yourself income investor. DIY saves a lot of money.
That’s what I do, using a variety of tools. And one I like is Motley Fool’s stock advisor.
Resource: Motley Fool stock advisor
Okay. That’s it for today. So, let’s wrap up.
Wrap Up: How To Calculate Investment Income In 3 Easy Steps
To calculate investment income. Follow these 3 steps:
- Obtain the investment’s current value
- Compute the investment’s yield
- Multiply the investment’s value by its yield (#1 x #2)
In other words, multiply the investment’s value by its yield to calculate the amount of annual investment income.
Investment income can be calculated for any individual income investment. Also, for an investment portfolio income.
Remember that investment income represents real cash. It is the constant stream of income that investments provide. And is the primary goal of income investors.
On the other hand,investment yield is a measure that helps income investors make comparisons between individual income investments and income portfolios.
Finally, take note of the examples at the end of the article. They show how to calculate monthly income from investment.
More Reading About Making Investment Income
Income Investing Resources
Throughout the article, I mentioned several of my favorite income investing and finance resources. And have summarized the below.
Whether you are choosing to invest for income, or not. Each of these resources can play a big role in making finance fun and easy
Best of all, most of them are free! Or, offered at a very affordable price. Because, as the saying goes, it takes money to make money.
- Trade stocks for free with the Webull app
- Get dividend stock recommendations from Simply Investing
- Get top stock picks from Motley Fool
- Manage all of your finances with Personal Capital
- Save on all of your online purchases with Rakuten
- Tax prep software from H&R Block
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.