Have you been thinking about ways to have more income? One of the things you can do is to add more passive income, which is essentially income that comes in where you are not actively involved.
Examples include income from rentals or business income that comes in the form of partnerships. Passive income can also come in the form of income from your portfolio.
If you are an investor, you might get money if your investment is a good one. That’s why people invest in the first place. But, to fully understand what is portfolio income, we have to go a bit deeper.
What Is a Portfolio?
Let’s go back to basics before we get into anything too complicated. A portfolio is a collection of all of your investments, but it depends on how you qualify each investment. Thus, the term “portfolio” could refer to any number of different assets or asset classes.
An asset is defined as anything of value that can be converted into cash. Asset classes are like categories for your assets such as stocks, bonds, business holdings, real estate interest, and commodities. So, when we put those together, a person’s portfolio might include all of their savings, retirement accounts, business interest, real estate holdings, stocks, bonds, etc.
Now, we can go even deeper and talk about investment portfolios. These generally refer to liquid investments including bonds, stocks, and mutual funds. These can also include retirement accounts.
You might also refer to a retirement portfolio, which includes all of your investment accounts that you will use in the future to ensure an income in your retirement years. Again, this can include real estate, bonds, stocks, and more. You may also have business portfolios, which is any small business interests, or a real estate portfolio, which is simply real estate that you hold.
It’s important to realize that a portfolio, no matter what kind, does not include any debt. As such, you could have a huge portfolio, but if you have a lot of debt, you could easily have a negative net worth or even a negative net income.
The interesting thing about portfolio size is that it can easily indicate how much income you can actually generate, which, in other words, is income.
What Is Portfolio Income?
You might think that it is easy to define the word income, but it’s not as easy as you might think. That is because the term "income" has several different definitions.
Gross income is one type of income. This refers to all of the income you take in. The other income is net income. This is the amount you actually get to keep.
Let’s say, for instance, you have a few rental properties that bring in $30,000 in gross income. That, again, is the income you get from the properties, and in this case, in the form of rent. However, keep in mind that you will have expenses, and if your expenses are $20,000, your net income would be $10,000.
When it comes to bonds, the income that comes from them is in the form of interest. So, if you have a simple bond portfolio, the income would be totally from interest. That’s pretty simple, right? Yes, but things can get a little more complicated.
Stocks and mutual funds are where things can get confusing. When you own a stock or you own some type of fund that owns stocks, some of them will pay dividends, which definitely qualifies as some kind of income. But there are also stocks and mutual funds that do not pay out dividends.
Is it possible to get income from a portfolio like this? Yes, it is, and if you want to secure a solid retirement, this is one of the best ways to create some income.
People who are using stocks or mutual funds to create a stream of income take out a set amount of their portfolio every year; for example, 3%, regardless of how well the mutual stocks or funds are performing. During a year where the market is good, that 3% is good because the base is bigger. When you have a year when the market is bad, that 3% is lower, so you won’t be taking the same amount each year.
You will have some years where your income is dramatically high, but at the same time, you will have years where it dives bombs. That said, this is a big-picture kind of thing, and over many years, you could have an income that is three times or more of what you actually put into the account.
This is only one way to create portfolio income, but there are others, too, from the simple to the complicated.
Increasing Portfolio Income
It is best to speak with a financial advisor if you are trying to create a portfolio that can create income like the one above. You can also use the following tips to increase portfolio income:
1. Buy Stocks with High-Paying Dividends
One way to increase your portfolio income is to buy stocks that pay above-average dividends. Companies may, for instance, raise the dividend payments as their revenue and profits increase. These payments might be paid right to the shareholders, or they might be used to buy more shares in the company.
This is referred to as a DRIP or dividend reinvestment plan. Here’s an example: Company X pays $2 per share in a year. So, if an ,men has 200 shares, they would get a payment of $400, which is $2.00 each of the 200 shares.
2. Buy Dividend Exchange-Traded Funds
Another option is to buy ETFs or exchange-traded funds, which track stocks with high-paying dividends. This is a very cost-effective method to boost your portfolio income.
One example of this is the Vanguard High Dividend Yield ETF. This ETF tracks an index known as the FTSE High Dividend Yield Index. This particular index includes almost 400 stocks that have high dividend yields.
In addition to considering ETF’s that pay out high dividends, you can also choose ETFs that are focused on things like how long the company has paid dividends or looking at companies that have a solid history of increasing dividend payments year over year.
3. Write Call Options
Investors can also increase their portfolio income by writing some call options against the stocks that they hold. Let’s imagine that there is an investor who owns 100 shares of Apple. Currently, the stock is trading at $175. The investor can agree to sell their stock at a certain price, which is called a strike price; then, they can sell these call options at a rate per share.
Now, these options do expire, so you have to keep that in mind. In this example, let’s say that the investor agrees to sell their stock if it rises 10%, which is $192.50. On the day the call option expires, Apple stock has to be at $192.50 or over in order to make any income. If it’s not, the option is worthless.
The investor can keep their stock, and they aren’t obligated to pay out anything else. If the stock is trading higher, though, the investor has to sell their stock, but they also get income from the call options. It might only be a couple of hundred dollars, but it’s still extra income.
Creating a Strong Portfolio That Can Generate Income
If you want to have a strong portfolio income, here’s some info about creating one:
1. Contribute to a 401k with Matching
Many companies will match employee contributions to 401k account. Though these contributions vary from one company to another, it’s like getting free cash into your account.
So, check your 401k and see if employer matching is an option. Not only are you getting free cash, but the funds will also grow over the decades, which can greatly add up over time.
2. Pay Down High-Interest Debt
If you have high-interest debt, such as with a credit card, you should pay it down as soon as you can. You want to take a look at all of your debts, and then rank them by the interest rate you are paying. The highest rate should be paid off first.
Pay the minimum on all of your debts except for the card with the highest rate. Do this until it is paid off. This will likely take several months, and in many cases, years, but getting out of debt will be extremely helpful.
3. Open and Fund a Roth IRA
The Roth IRA is an excellent option for those looking to invest in their retirement. If your annual income is less than $137,000 as a single person or $203,000 as a married couple, you can open up this type of account.
Contributions to these accounts are made with post-tax dollars, and you can withdraw the contributions without a penalty. Once you are 59 ½ years old, you can take money from the account tax-free.
4. Buy a House
If you don’t already own a home, try to buy one. By owning your home, you are basically taking what you used to have as an expense and your rent into equity. On top of this, any interest that you pay on your mortgage is tax-deductible.
Plus, your home will likely always gain value, on average, from three to percent each year. Ergo, if you buy a home for $100,000, you are basically adding $3,000 to $4,000 per year in value.
5. Create a Reserve Fund for Emergencies
Once you buy a home, you should work on creating a reserve fund for emergencies. Some of the things that should be included in this are mortgage payments, insurance costs, grocery costs, minimum payments for credit cards, student loan payments, car payments, and utility bills.
You can further get more out of this by investing these funds in a savings or a money market account. You can also use the money for six CD’s, stacking them so that one matures each month.
6. Look into Other Investment Options
You also might want to consider looking into other investment options. These include mutual funds, stocks, bonds, CDs, or even real estate investment trusts. The best way to do this is to work with a broker. Nonetheless, there are certainly other ways that you can do this, including by trading online.
Opening a brokerage account doesn’t have to be overly expensive nor does it have to be overly complicated. You can also choose from many different models based on how you want to see your investment perform.
7. Invest in Yourself
You also might want to consider investing in yourself. This can be in the form of starting a new business, improving your professional skills, or even taking classes for professional certification or a degree.
Many universities have programs that offer professional certification in topics such as technology, finance, management, and hospitality. If you are finding that you like investing, you can also look into enrolling in finance or accounting courses.
Although it will cost a bit of money to get your certificate or degree, once you have it, your income could be higher, which means that your investment will pay for itself time and time again.
8. Make an Investment in Your Child
Another thing that you can do is invest in your child in the form of helping them pay for a college or trade education. Just keep in mind that you have no obligation to do this, and for many parents, this turns out to be a bad investment as their children don’t stay in school. In fact, many financial advisors recommend that the student pays for their education, and then you, as the parent, offer to pay them back if they leave school successfully.
Just keep in mind that before you give money for your child's education, you should have your own retirement taken care of first. This will be more important in the long run when compared to the four or five years that your child will be spending in school.
On top of that, your child will have options such as loans, scholarships, and grants to help them through, but you won’t have the same choice when it comes to your retirement.
Now that you have read through this entire article, you already know the answer to the question "What is portfolio income?" and you know how to take advantage of it, as well as how to create a powerful portfolio that will work for you. Start now, and you will soon see a great improvement in your financial future.