Portfolio income is money received from investments, dividends, interest, and capital gains. Royalties received from investment property also are considered portfolio income sources.
It is one of three main categories of income. The others are active income and passive income.
Most portfolio income gets favorable tax treatment. Dividends and capital gains are taxed at a lower rate than earned income. In addition, portfolio income is not subject to Social Security or Medicare taxes.
Understanding Portfolio Income
Of the three categories, active income is the easiest to understand. It is money earned by doing a job or performing a service. The Internal Revenue Service (IRS) calls it wages, salaries, and tips.
Key Takeaways
- Portfolio income includes dividends, interest, and capital gains.
- Portfolio income generally gets favorable tax treatment compared to active or passive income.
- Portfolio income is not subject to Social Security or Medicaid withholding.
It's a little trickier to distinguish portfolio income from passive income.
Passive income is a revenue stream that may involve some initial effort or expenditure but continues to reap payments down the line. Music and book royalties and property rent payments are examples. The interest on savings accounts is passive income. A limited partnership, in which an individual owns a share of a business but does not participate in its operation, produces passive income.
Investing in an ETF that buys dividend-paying stocks is one way to increase portfolio income.
Portfolio income does not come from passive investments and is not earned through regular business activity. It comes from dividends, interest, and capital gains, or from interest paid on loans.
The categories of income are important for tax purposes. Losses in passive income generally cannot be offset against active or portfolio income.
3 Ways to Increase Portfolio Income
Purchase High-Paying Dividend Stocks
Investors can increase their portfolio income by buying stocks that pay above-average dividends.
Dividends can be paid directly to the shareholder or used to purchase additional shares in the company, referred to asa dividend reinvestment plan (DRIP). For example, a company may pay a cash dividend of $2 per share annually. If the investor has a holding of 200 shares, the cash dividend payment would be $400 ($2 x 200 shares).
Purchase Dividend Exchange-Traded Funds
Buying ETFs that specifically track high-paying dividend stocks is a cost-effective way to increase portfolio income. For example, the Vanguard High Dividend Yield ETF tracks the FTSE High Dividend Yield Index. The index includes 396 stocks that have high dividend yields.
The selection criteria for other dividend ETF choices may focus on how many consecutive years the company has paid a dividend or on companies that have a history of increasing their dividend payments each year.
Write Options
An investor can increase portfolio income by writing call options against their stock holdings.
For example, suppose an investor owns 100 shares of Microsoft and the stock is trading at $175 per share. The investor could agree to sell the shares if the stock rises 10% to $192.50. To do this, the investor sells 1 call option with a strike price of $192.50 at $2.
The investor would receive an option premium (portfolio income) of $200 ($2 x 100 shares). On the day the option expires, it becomes worthless if Microsoft is trading below $192.50, allowing the investor to keep the premium with nofurther obligation. However, If Microsoft is trading above the strike price on the day the option expires,the investor is obliged to sell their shares to the buyer of thecall option at $192.50, which means they receive $19,250 ($192.50 x 100 shares), plus the $200 options premium.
FAQs
Investing in an ETF that buys dividend-paying stocks is one way to increase portfolio income. Portfolio income does not come from passive investments and is not earned through regular business activity. It comes from dividends, interest, and capital gains, or from interest paid on loans.
How do you increase your portfolio? ›
How Can You Make Your Portfolio Grow Faster? Ways to make your portfolio grow faster include choosing stocks over bonds, investing in small-cap companies, investing in low-fee funds, diversifying your portfolio, and rebalancing your portfolio regularly.
What are examples of portfolio income? ›
Portfolio income is income generated from investments such as stocks, bonds, mutual funds, exchange-traded funds (ETFs) or real estate. It consists of capital gains, dividends and interest from a traditional savings account, a money market account, a certificate of deposit (CD) or a bond.
How does portfolio value increase? ›
Invest as early as you can, save as much as possible, optimize risk and returns through proper asset allocation and diversification, and keep investment taxes low. These are the most important factors in building wealth and increase your portfolio value.
How does a portfolio grow? ›
Take advantage of compound interest. Compound interest is the concept of earning interest not only on your initial investment but also on the accumulated interest over time. By reinvesting the interest earned, your portfolio can experience exponential growth, allowing your wealth to snowball over the long term.
How can I improve my business portfolio? ›
5 Tips to Enhance Your Business's Project Portfolio Management
- Adopt a Top-Down Approach. ...
- Risk Management. ...
- Strategic Alignment With Business Objectives. ...
- Regularly Evaluate the Performance. ...
- Improving the Project Selection Process. ...
- Endnote.
Six Places to Look for Multiple Streams of Income
- Consult with Clients. The easiest starting point for additional income is to share your expertise by offering consulting or coaching services, said Clark. ...
- Author a Book or Start a Blog. ...
- Start a Podcast. ...
- Speak Professionally. ...
- Host Live Events. ...
- Invest in Real Estate.
How do investors generate income in their portfolio? Dividends, REITS, Bonds, Covered Calls, and Short Puts are some popular choices.
How do you produce portfolio income? ›
Portfolio income is money received from investments, dividends, interest, and capital gains. Royalties received from investment property also are considered portfolio income sources. It is one of three main categories of income. The others are active income and passive income.
What Is a Growth with income portfolio? ›
A growth and income fund is class of mutual fund or exchange-traded fund (ETF) that has a dual strategy of both capital appreciation (growth) and current income generated through dividends or interest payments.
Examples of growth assets are equities (i.e., stocks), real estate, and cryptocurrency. Since growth assets are considered aggressive, they are riskier and more volatile than other assets. Unlike income assets such as bonds, growth assets cannot guarantee you will get your principal and interest.
What is an income portfolio? ›
An income portfolio is any combination of loans, investments, securities, or real estate assets owned by an investor. The primary objective of creating this portfolio is to generate income from dividends, interest, and capital gains for the owner.
How to grow your assets? ›
It's really common sense, but budgeting, maintaining a consistent savings habit, avoiding or paying off debt, stashing money away in an emergency fund and spending less than you make are all pillars of building wealth. Investing is the more glamorous side, and that's also necessary, of course.
What does a successful portfolio look like? ›
What Does a Good Portfolio Look Like? A good portfolio will depend on your investment style, goals, risk tolerance, and time horizon. Generally speaking, a good degree of diversification is recommended regardless of the portfolio type, in order to not hold all of your eggs in one basket.
What is a portfolio strategy? ›
Portfolio strategy encompasses the decisions that investors make as they attempt to preserve or grow wealth for the future. 1. Without strategy, investors can fall prey to behavioral fallacies and act irrationally, putting their money (and potentially, reputation) at risk.
What does a good portfolio look like? ›
A diversified portfolio should have a broad mix of investments. For years, many financial advisors recommended building a 60/40 portfolio, allocating 60% of capital to stocks and 40% to fixed-income investments such as bonds. Meanwhile, others have argued for more stock exposure, especially for younger investors.
What makes a strong portfolio? ›
Choose a layout, color scheme, and typography that align with your personal brand and the type of work you do. A clean and organized layout not only enhances user experience but also reflects your attention to detail. Remember, your portfolio's design should complement your work, not overpower it.
How to build portfolio with $1,000? ›
Here's how to invest $1,000 and start growing your money today.
- Buy an S&P 500 index fund. ...
- Buy partial shares in 5 stocks. ...
- Put it in an IRA. ...
- Get a match in your 401(k) ...
- Have a robo-advisor invest for you. ...
- Pay down your credit card or other loan. ...
- Go super safe with a high-yield savings account. ...
- Build up a passive business.
A growth portfolio consists of mostly stocks that are expected to appreciate over the long term and could potentially experience large short-term price fluctuations. An investor considering this portfolio should have a high risk tolerance and a long-term investment time horizon.
