Types of Investment Income: 15 Ways To Profit Now

Generating Investment Income From The Best Income Investments

I love collecting different types of investment income.  Most importantly, an income investor should understand the best income investments for their portfolio.

So today, we will review the 3 types of investment income. And answer the all-important question.

How much do I need to invest to earn enough income each month? Let’s dive in…

types of investment income

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

To start, I want to make sure we are clear on today’s investing topics. And set an outline for the rest of the article.

What Is Investment Income?

First of all, let’s define investment income.  It is the income derived from investments or money lent.

Sometimes, investment income is referred to as portfolio income.

3 Types Of Investment Income

Furthermore, there are three types of investment income. They are:

  • Interest
  • Dividends
  • Capital gains

Finally, I will define each of these 3 different types of investment income. And provide many examples of the best income investments. Such as…

Assets That Generate The 3 Types Of Investment Income?

So we know, an income investor’s goal is to earn interest, dividends, and capital gains. This means investing in top-notch income-producing assets.

Here are 15 examples of assets that are the best income investments:

  • Certificates of deposit
  • Savings accounts
  • Money market accounts
  • US savings bonds
  • Corporate bonds
  • Municipal Bonds
  • Peer-to-peer loans (P2P)
  • Preferred stocks
  • Dividend-paying common stocks
  • Real estate investment trusts (REITs)
  • Master limited partnerships (MLPs)
  • Open-end mutual funds
  • Closed-end mutual funds
  • Exchange-traded funds
  • Real estate

You can see income investors have plenty of income investment choices. From which to select.

Next, let’s dive deeper into the 3 types of investment income. And the assets that produce it.

All of which I just highlighted in summary form. We want to cover exactly how they can help increase investment portfolio income.

First Type Of Investment Income: Interest

best investment income

Interest income is the first type of investment income I want to talk about. Furthermore, interest income is the amount paid to a person for lending their money.  In other words, allowing another entity use one’s funds.

These types of savings products are very conservative. Meaning they have little risk of loss. Perfect for anyone interested in defensive investing.

First, let’s describe what is known as interest-bearing accounts.

Certificates Of Deposit

A certificate of deposit (CD) is a savings certificate with a fixed maturity date and specified interest rate. 

Most CDs have minimum investment requirements. And a minimum time you must lend your money.

Savings Accounts

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

Money Market Accounts

Money market accounts are another type of interest income-bearing account.  They are comprised of very short-term, high-quality investment securities.

You can find competitive interest rates on savings and money market accounts online. I like CIT Bank for this purpose.

You can learn more about CIT Bank here.

US Savings Bonds

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

Final Words On Interest Bearing Accounts

Lend your money to a financial institution that provides one of these products. And earn interest income.

What is the advantage of this type of income investment? It’s guaranteed investment income. With a small potential for risk of loss.

The disadvantages? First of all, interest rates are very low. So, these income investments do not pay much.

Furthermore, the stable value that these investments are known for. This means there is no opportunity for capital gains.

Want to make a little more money off your investments? Then, consider bond investments and loans for the interest income they provide.

Here are a few types of these income investments to consider…

Municipal Bonds

State and local governments also borrow money to fund their operations. They do so by issuing municipal bonds.

Corporate Bonds

For-profit companies issue corporate bonds to borrow money from investors.

Short-term bonds from stable companies pay lower rates of interest income.

In contrast, buy long-term bonds of shaky company loaded up with debt. And be rewarded with much higher interest rates.

Of course, you take a greater risk that your money may never be paid back. If the company issuing the bonds goes bankrupt.

Peer-to-peer loans (P2P)

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.

That concludes the review of 7 types of income investments.  All of which produce interest income.

Next up, my favorite type of investment income. That is, dividend income…

Second Type Of Investment Income: Dividends

best income investments

Dividends are the second type of investment income.  Dividends are distributions of economic value made by an entity to the owners of its stock.

First of all, these distributions can come in a variety of forms.  But cash is the most typical form. And those cash payments are made from the entity’s profits.

Furthermore, dividends are one very important way for stockholders. To share in the financial success of one or more companies.

Note that both individual company stocks and funds pay dividend income. These are the “entities” that I am referring to.

And finally, when it comes to buying and selling stocks. Be sure to trade commission-free.

I use the Webull app. It’s fast and easy to use.

Plus, has excellent research capabilities. And stock alert settings to manage your investments when you have a lot going on.

You can learn more about Webull here.

Here are some examples of the best income investments that pay dividends…

Common Stocks

Dividend-paying common stocks provide the investor with partial ownership in a company that pays dividend income.

Some companies also consistently increase their dividend rate per share. They are known as dividend growth stocks. In my opinion, dividend growth stocks are one of the best investment income types.

I use the Simply Investing report to identify high-quality dividend stocks. You too can get its insightful analysis and dividend stock recommendation delivered to your inbox each month

You can learn more about the Simply Investing report here.

Preferred Stocks

Preferred stocks are hybrid securities that have a mix of bond and common stock characteristics.

Preferred’s are known for the high rates of dividend income that they pay. On the other hand, they do not have as much potential to produce capital gains. As compared to common stocks that pay dividends.

Real Estate Investment Trusts (REITs)

Real estate investment trusts (REITs) refer to a company that owns, finances, or manages income-producing real estate.

First of all, REITs issue common stock to the public. Furthermore, REIT stocks pay dividend income. I think REITs represent some of the best investment income you can find for your dollars.

Master Limited Partnerships (MLPs)

Master limited partnerships (MLPs) are a business venture that exists in the form of a publicly traded limited partnership.

Often they own and hold physical assets. That they operate to produce cash flow. For example, energy distribution pipelines.

Like REITs, MLPs issue common stock to the public.  And the stock pays investment income in the form of a dividend.

Next, let’s transition to funds that pay dividend income.

A Few Thoughts On Funds That Pay Dividend Income

You can build an entire income portfolio with just funds. Let’s discuss investment funds in greater detail…

Funds that pay investment income are a collection of several different types of income investments.

They are similar in some respects.  Because all funds are a collection of securities offering the investor immediate diversification across an asset class.  Or, diversification across multiple asset classes.

Just think about the income-producing investments we have discussed thus far. You can find an investment fund that puts them together in an income portfolio for you.

On the other hand, different funds will have their specific investment objectives. That dictates the types of income investments it holds. Most importantly, that portfolio pays the income investor dividends.

There are several different types of funds that pay dividend income…

Exchange-Traded Funds (ETFs)

An ETF is a collection of securities, such as stocks. ETFs are passively managed. So, they track an underlying index.

An ETF is called an exchange-traded fund since it is traded on an exchange just like an individual stock.

Therefore, the price of an ETF’s shares will change throughout the trading day. As the shares are bought and sold on the market.

Open-End Mutual Funds

Open-end mutual funds are similar to ETFs.  They are also a collection of securities.  However, they trade only once per day after the markets close.

Also, open-end funds are known for active management. Meaning a professional money manager chooses the best income investments for the portfolio.

Closed-End Mutual Funds

Close-end mutual funds have some unique characteristics. They may be the most unusual or exotic investments on our list today.

First of all, they trade on an exchange like an ETF. Unlike other funds, they have a limited amount of approved and authorized shares that they can issue.

Furthermore, closed-end funds can be either actively or passively managed. Finally, some of these funds use leverage to boost the investment income they can pay.

Leverage just means they borrow money. To invest money.

Leverage can increase investment income. But also increases investment risk. We will talk more about this topic a little later in the frequently asked questions.

Next, our last of the 3 types of investment income, capital gains. This is where pure income investing meets with growth investing.

Third Type Of Investment Income: Capital Gains

generating investment income

Investment income from capital gains is created by selling all or a portion of individual investments.

Also, capital gains are created when an investment fund sells all or a portion of its holdings. Capital gains from funds are then passed through to the income investor in the form of dividend income.

In either case, a capital gain becomes realized from the sale of an asset. Versus unrealized “paper profits” where a sale has yet to be made.

Investment income from capital gains can be created from almost all of the income investments we have discussed thus far.

With one exception. Because it is nearly impossible to create capital gains from interest-bearing accounts.

Remember that interest-bearing accounts have a stable value. Whereas, capital gains are created from asset price appreciation. And the sale of the asset at a higher price versus the original cost.

This leads me to one more type of income investment that can produce capital gains. And thus, investment income…

Real Estate

Land and buildings are forms of real estate. They are physical, or hard assets that appreciate.

Most people are familiar with real estate investing. And know that real estate investments come in several different forms. For example residential real estate, commercial real estate, farmland, etc.

Buy real estate and later sell it at a higher price. You have created a capital gain that represents investment income.

Okay, that concludes our review of the 3 types of investment income. And, 15 possible investment assets for generating investment income.

Next, I want to cover several frequently asked questions. Then, I will wrap up.

guaranteed investment income

How much do I need to invest to make $500 a month?

To make $500 a month in investment income you’ll need to invest between $100,000 and $200,000.

The actual amount of money you’ll need to invest in creating $500 per month from an income portfolio depends.  Specifically, it depends on the interest rates and dividend yields of the investments you buy.

These individual interest rates and dividend yields combine. To form an overall income portfolio rate.

In this example and the next one, I’m assuming an income investor can build an income-producing portfolio with an average annual rate between 3% and 6%.

The higher the rate. The lower amount of money that needs to be invested.

Understand that higher investment income rates come with a tradeoff. Because higher rates mean greater investment risk.

How much do I need to invest to make $1,000 a month?

To make $1,000 a month in investment income you’ll need to invest between $200,000 and $400,000.

Once again, the actual amount of money invested to create $1,000 per month from an income portfolio depends.  Specifically, it depends on the interest rates and dividend yields of the specific investments you choose.

Okay. That concludes 2 examples of how to calculate investment income. I find beginning investors are the ones that aren’t afraid to ask these all-important questions. Specifically, “how much money can I make”?

And, I get it. Because making money is what it’s all about!

Next, let’s move on to some different types of questions.

Is Investment Income Taxable?

Generally speaking, we are dealing with taxable investment income. But there is a wide range of tax circumstances and tax rates.

Furthermore, in some cases, taxes are not due. For example, municipal bonds are an example of tax-free investment income. That is exempt from federal income tax.

And U.S. saving bonds are tax-deferred. Meaning no tax is due until a bond is sold.

Some income investments are subject to a lower tax rate. This is also known as preferential tax treatment.

For example, certain types of dividends. Also, long-term capital gains.

Finally, income from interest-bearing accounts is taxed at ordinary income tax rates.  This means taxes can amount to more than 40% of the interest income.

It depends on the state in which you live. And your tax situation.

There are so many tax circumstances and scenarios. When it comes to taxes on investment income.

So, it is best to consult with your tax advisor. But, I can say this for certain…

Put your income investments in an IRA. Depending on which type of IRA you choose, taxes will either be deferred. Until you retire and need the money.

Or, tax-free. If you choose a Roth IRA.

Regardless, be smart with your retirement funds. Been meaning to set up an IRA? Then, M1 Finance is an excellent place. To quickly and easily open an online IRA account.

You can learn more about M1 Finance here.

How Does Investment Income Differ From Passive Income?

The liberal and informal definition of passive income means making money outside of that full-time 9-5 or 24/7 job. Where you trade time for money.

Passive income implies money earned with little effort. Or, with effort upfront that continues to accrue earnings long after the effort has been expended.

On the other hand, there is a formal definition of passive income. It is…

Any rental activity or any business activity in which an individual does not materially participate.  And, there are very specific rules that define what material participation is and is not.

But here’s my informal take on this topic. For what it’s worth…

Investment income is a form of passive income. Set your investment portfolio up intelligently. And you will make money in the future with very little effort. This seems pretty passive to me.

Therefore, making an investment income is a subset of the broader category. Called passive income.

So, there are forms of passive income that do not qualify as a type of investment income. That’s why I didn’t cover them in this article.

For example, rents receive from real estate holdings. Or, royalties received by granting the right of use to a creative endeavor.  Like a book or musical recording.

These examples are passive income. But not, a type of investment income.

Should You Borrow Money To Generate More Investment Income?

Earlier I mentioned that closed-end funds borrow money. And invest the borrowed funds to create additional investment income.

It’s a pretty simple investment strategy on the surface. For example, if you can get a loan at a 2% rate. Invest that money in an income portfolio at a higher rate. You earn income on the spread.

But this is a risky strategy. If your investments perform poorly.

Because the loan payments will still be due. Increasing your investment losses.

So, I would recommend leaving this approach to the pros. Those who manage leveraged closed-end funds.

Especially if these are types of retirement income for you. Or, you need the money for day-to-day living expenses before retiring.

That doesn’t mean you can’t take on smart debt as part of your total financial plan. Like a mortgage on your residence. Or, a home equity line of credit.

Managed properly, this is smart debt. And frees up your cash to invest in income investments.

Looking for a way to manage your total financial plan? Then I suggest Personal Capital.

Consolidate all of your investments and monthly spending online and in one place. This way you can see your investment income coming in. And your expenses going out. There is no need to manage and login to multiple accounts.

You can learn more about Personal Capital here. Best of all, it is free to sign up and use.

How Do You Calculate Investment Income?

Here are the 3 steps required to calculate investment income:

  1. Obtain the investment’s current value
  2. Compute the investment’s yield
  3. 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.

Investment income can be calculated for a single investment. Or, calculated as an average for an entire income portfolio.

Okay. That completes the important questions I wanted to cover. So, it’s time to wrap this up.

Types of Investment Income Wrap Up

article wrap up

Now you know how to make investment income. Hopefully, this article will you develop or refine your income investing approach. So, allow me to recap what we covered.

First of all, the definition of investment income. It is the income derived from investments or money lent.

Furthermore, there are three types of investment income

  • Interest
  • Dividends
  • Capital gains

Finally, examples of assets that produce investment income. We covered 15 types of income streams today:

  • Certificates of deposit
  • Savings accounts
  • Money market accounts
  • US savings bonds
  • Corporate bonds
  • Municipal Bonds
  • Peer-to-peer loans (P2P)
  • Preferred stocks
  • Dividend-paying common stocks
  • Real estate investment trusts (REITs)
  • Master limited partnerships (MLPs)
  • Open-end mutual funds
  • Closed-end mutual funds
  • Exchange-traded funds
  • Real estate

More Reading About Generating Investment Income

My Favorite Tools To Manage The Types Of Investment Income

Throughout the article, I mentioned some excellent tools. To help in managing your finances and investment income. I have summarized them here for your convenience:

Disclosure & Disclaimer: I am not a licensed investment adviser, financial adviser, or tax professional. And I am not providing you with individual investment advice, financial guidance, or tax counsel. Furthermore, this website’s only purpose is information & entertainment. And we are not liable for any losses suffered by any party because of information published on this blog.

3 Types Of Investment Income & 15 Ways To Profit Now