Let’s look at different examples of portfolio income assets today. Then discuss how to increase your portfolio income from those assets.
To do this, I’m going to break the article up into 3 main parts.
- Types of income
- Examples of portfolio income-producing assets
- How to increase portfolio income
I’ve been an income investor for nearly 20 years. And, have been living off portfolio income ever since I retired early several years ago.
Hopefully, you can benefit from my money management experience. So let’s get started with types of income.
Types of Income
There are 3 types of income: earned income, passive income, and portfolio income.
Earned income comes from 2 possible sources. You work for someone who pays you. Or, you own and run a business.
The strict definition of passive income says it can be generated from these 3 sources.
- Renting equipment
- Renting real estate
- Owning a business in which you are not involved
Finally, portfolio income is interest, dividends, or capital gains. It is derived from investments or money lent.
So, let’s go through some examples of portfolio income-producing assets next. Why? Because knowing where to target your investment dollars is important. It is the foundation for starting an income portfolio.
But, asset selection is only the starting point. There is more to portfolio income management than just picking the right investments.
Examples Of Portfolio Income-Producing Assets
There are many examples of portfolio income assets. Here are several for your consideration:
A certificate of deposit (CD) is a savings certificate with a fixed maturity date and 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.
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 lending (P2P) allows individuals to obtain loans directly from other individuals. The P2P lending process cuts out traditional financial institutions as the middleman.
Preferred stocks are hybrid securities that have a mix of bond and common stock characteristics.
Dividend-paying common stocks provide the investor with partial ownership in a company that pays dividends.
Open-end mutual funds, closed-end mutual funds, and exchange-traded funds have different characteristics. But, they are all similar in that they are a collection of securities offering the investor immediate diversification across an asset class. Or, diversification across multiple asset classes.
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 to the public that pays a dividend.
Related: How to simplify your finances
How To Increase Portfolio Income
Now, we have numerous examples of portfolio income-generating assets. Those asset types are where we want to put our investment dollars to produce portfolio income.
But, there is much more you can do to increase your portfolio income. Let’s go through several portfolio income ideas for generating additional cash flow.
Example 1 – Invest new capital into your portfolio
Create extra earned income over and above your expenses. Then add that extra money to your portfolio income assets.
Example 2 – Opt for investments with higher interest rates or yields
The example list of portfolio income assets we just covered is presented from the lowest interest rates and yields to the highest.
By investing money in the assets further down the list, you will create more income from higher rates and yields. But, you will also take on more risk.
Example 3 – Invest in dividend growth stocks
Dividend growth stocks are stocks of companies that increase their dividend payments regularly. This is one of the most passive ways to increase portfolio income.
Just hold a dividend growth stock for the long term. And the company will increase its dividend payments every year.
Example 4 – Reinvest dividends and interest back into your income portfolio
Maybe you do not need the income from interest and dividends that you are earning? Then reinvest it back into your portfolio of income assets.
Example 5 – Change mix of portfolio income holdings
Sell lower-yielding assets from your portfolio. Then, invest the proceeds in some of the higher-yielding examples of portfolio income assets.
Example 6 – Strategically sell holdings in the portfolio
Our definition of portfolio income includes capital gains. Create income by selling portfolio assets periodically.
Example 7 – Reduce income taxes on portfolio income
Reducing taxes depends on your tax situation. It is hard to give specific guidance. But, every dollar of tax you save increases the after-tax portfolio income you keep for yourself.
So, it is important to know that some forms of portfolio income receive preferential tax treatment. Specifically, dividends and long-term capital gains are taxed at lower rates than interest from savings products.
Example 8 – Invest in qualified accounts
Investing in qualified accounts is another way to minimize taxes. In the US, qualified accounts include the 401(k), 403(b), Roth IRA and regular IRA.
Depending on the type of account, taxes are either deferred or eliminated.
Example 9 – Keep portfolio turnover low
Portfolio turnover means how often you buy and sell your portfolio income assets. A certain amount of selling is necessary for rebalancing or realizing capital gains for income (example 6).
But, buy and sell too much and you are more likely to increase taxes and increase transaction costs. The more taxes and transaction costs you incur, the less portfolio income that remains for you.
Example 10 – Reduce investment fees
Investment fees are another area that can take a bite out of your portfolio income. Mutual fund fees are taken off the top of any income that a mutual fund portfolio produces. Thus, fees reduce the cash that ends up in your pocket.
Invest in low-cost exchange-traded funds. Use a discount brokerage firm for your transactions. Many online stock trading platforms are commission-free.
Example 11 – Never over-pay for portfolio income investments
The income from many portfolio income assets is inversely related to the price you may. Higher prices, mean less portfolio income.
Look for value. Dollar-cost average into stock and bond investments. Avoid buying overvalued stocks.
Example 12 – Diversify portfolio income sources
One of the reasons I provided so many examples of portfolio income-generating assets is for diversification. You want to be careful about having all your income coming from just one or two sources.
Diversification may not lead to the highest level of portfolio income possible. But it will protect your income from an oversized portfolio income asset running into financial difficulty. Dividend reductions, corporate bankruptcies are just a couple of examples that can damage your income stream.
So remember to protect the income you earn through diversification.
Example 13 – Write options to increase portfolio income
Finally, an investor can increase portfolio income by writing call options against their stock holdings. This is a little more advanced but can be effective if you know what you are doing.
Of the 13 examples of how to increase portfolio income, writing options is the only one I have not used for my accounts.
We have covered a lot of ground, so let’s recap and summarize the main points of this article covering examples of portfolio income and how to increase it.
Summary: Types Of Income
There are 3 types of income.
- Earned income
- Passive income
- Portfolio income
This article’s emphasis is placed on portfolio income and how to increase portfolio income.
Summary: Examples Of Portfolio Income-Producing Assets
First of all, target income-producing assets for your portfolio. Here are the examples we covered.
- Certificates of deposit
- Savings accounts
- US savings bonds
- Money market accounts
- Corporate bonds
- Peer-to-peer loans (P2P)
- Preferred stocks
- Dividend-paying common stocks
- Open-end mutual funds
- Closed-end mutual funds
- Exchange-traded funds
- Real estate investment trusts (REITs)
- Master limited partnerships (MLPs)
Summary: How to Increase Portfolio Income
Then, implement some or all of the ways to increase portfolio income we have discussed.
- Invest new capital
- Opt for investments with higher interest rates or yields
- Invest in dividend growth stocks
- Reinvest dividends and interest
- Optimize your mix of portfolio income holdings
- Strategically sell holdings for cash
- Reduce income taxes
- Invest in qualified accounts
- Keep portfolio turnover low
- Reduce investment fees
- Never over-pay for an investment
- Diversify portfolio income assets
- Write options
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