Financial planners often discuss income in terms of active income, passive income and portfolio income. Active income is the money you make through your job or your business. Passive income is money you earn without materially participating in the venture; it includes money from rental property. Portfolio income includes investments and other assets.
Portfolio income is money derived from stocks, bonds and other investment properties. According to “Radical Accounting,” it includes both gains and losses from investments. You gain income from your portfolio when your investments collect interest and experience gains. Royalties are typically classified as portfolio income.
Royalties are payments received for the use of something you own. According to CompleteTax.com, there are two common types of royalties: intellectual property (copyrights, trademarks, etc) and royalty rights from extracting natural resources (oil, gas and minerals). Investors can also place money in royalty trusts. A royalty trust holds assets in natural resources; the investors pay money to the company controlling those assets and experience gains/losses based on the returns from that company’s extraction efforts.
Royalty Pros and Cons
Portfolio income is subject to certain risks. The nature of the risk depends on the type of asset involved. Royalties, like other aspects of a portfolio, have their own pros and cons. Royalties may outperform traditional investment properties such as stocks. For example, royalties experienced positive gains in 2008 when, in that same year, the S&P 500 lost 40 percent of its value, according to Oil and Gas Investor. Royalties can be a finite prospect, however. According to MoneyCone.com, if the royalties derive from natural resources, the income from the royalties ends when the resources dry up.
Financial planners stress the need for a diverse portfolio; diversification helps reduce risks when one of your investments takes a hit. According to Forbes Personal Finance, common sense should dictate investment decisions. Investing in royalties as a way to diversify and strengthen your portfolio can be lucrative. Investors should consult independent financial advice to determine what is best for their unique financial positions.