Definition of Portfolio Income
A portfolio in the investment sense is the total collection of investments or securities that make up the investor's holdings. Someone who wants to stop working and live off their investment income is planning on using the portfolio income. Portfolio income can be generated in different ways with different types of investments.
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Identification
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Portfolio income is the dividends, interest and royalties received on the investments in the portfolio. The portfolio income also includes any gains, called capital gains, realized from selling an investment. Dividends are paid by stocks and mutual funds. Interest is earned from bonds, CDs and private-party loans. Royalties are received for allowing the use of property. Royalties can come from interest in oil and gas wells, mineral rights or timber property.
Function
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Dividends from stocks and interest from bonds are paid automatically. Mutual fund dividends can be accepted as cash or reinvested into more shares of the fund. Capital gains only occur when an investment is sold. The investor has control over the timing of portfolio income through capital gains. Mutual fund capital gains will be paid if the fund has more gains that losses on securities sold. Mutual funds must pay capital gains at least once a year.
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Considerations
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Investors looking for portfolio income to pay living expenses often concentrate on bonds for the competitive rates of interest and regular interest payments. Investors looking to minimize taxes will want to limit portfolio income by holding investments that do not generate regular portfolio income, like nondividend-paying stocks or precious metals.
Potential
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In addition to bond income, investors should look at other asset classes to generate portfolio income. Corporations have the ability to increase the company's dividend payout as profit increases. The S&P list of Dividend Aristocrats are corporations that have paid increasing dividends for 25 or more years. Alternatively, royalty-paying investments may provide tax benefits as well as attractive income.
Warning
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A portfolio used to provide current income to pay expenses must be managed to factor in income taxes and the effects of inflation. What looks like an adequate level of income may not be so after the tax man has been paid and a few years of inflation have eroded the income's buying power. A portfolio that is being managed for a high level of current portfolio income must also have considerations for growth of income and assets.
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