Have You Thought About Building an Income Portfolio?

by Miranda Marquit · 6 comments

Many of us dream of earning money without having to do a lot of extra work. This is known as passive income, because the money keeps coming in without you doing much for it. You aren’t actively trying to earn it; instead, you set something in motion, and then enjoy the passive income as it rolls in.

One of the ways to create passive income is to build an income portfolio. An income portfolio is an investment portfolio designed specifically to provide you with a regular revenue stream. It’s not meant to give you huge capital gains (although you can experience capital gains). The main purpose is to provide steady income. However, it’s important to note that building an income portfolio isn’t something that happens overnight. You need to plan your income portfolio, and build it over the course of years.

Creating an Income Portfolio

As you consider building an income portfolio, your focus should be on investments that offer regular payouts in some form. Dividend paying stocks are popular for income portfolios because they regularly pay out a portion of profits to shareholders. You can choose certain stocks, such as dividend aristocrats, that have increased payouts consecutively for at least 25 years. This is one way to increase the chances that you will have stable cash flow.

Another popular choice for income portfolios is the use of bonds. These amount to owning a piece of the loan to certain organizations. You can purchase corporate and government bonds, and receive regular interest payments. At the end of the term, you receive your principal back, and you can reinvest in more bonds. Certificates of deposit and other interest bearing accounts can also be incorporated in an income portfolio.

For those who can handle more risk, the use of P2P lending can be another interesting way to boost an income portfolio. You have the chance of higher returns — better income from interest — but you have to accept that there is a greater risk.

In the end, though, it’s important to understand that all investment comes with risk, even the relatively safe investments that many people use in an income portfolio. Dividends can be cut, or eliminated altogether, at any time, or you can sustain capital losses from a stock price drop. Bonds and P2P loans can default. Even with cash products, you are at risk due to the ravages of inflation.

Patience in Building Your Income Portfolio

Building an income portfolio requires patience, though. Most people don’t have a large chunk of capital that they can just put into an income investment for instance cash flow. Instead, it requires years to build up the portfolio so that your holdings of dividend stocks, bonds, and other investments are large enough to provide you with returns that can reasonably contribute to your income. Indeed, it can take seven, 10 years, or more years, depending on how much money you can put toward building your portfolio.

As you build your income portfolio, it’s important that you create a plan. Carefully consider the investments you choose, and make a plan to contribute to your portfolio regularly. Over time, your portfolio will grow — and so will your potential income stream.

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  • kym says:

    I am really lucky as my Father is great about developing portfolios. He is one of those people that started doing it 30 odd years ago and has managed to make it work. Personally – I find it all a bit daunting. Just recently I started to dig into it – wish I had done it sooner. Great article!

    • David @ MoneyNing.com says:

      Ahhh your father is a real example of someone who benefited from compound interest!

      Just start slow and build your portfolio. You’ll pick things up in no time as you read more, and add more money to your portfolio.

      Keep at it!

  • Long-Term Returns says:

    Investing for income is a solid plan as long as you keep a long-term outlook, re-invest dividends and interest, and don’t panic when prices plunge (especially on stocks, but can happen for bonds too).

    Two great starter funds for income ($3,000 minimum to get started with each one):
    Vanguard High Dividend Yield Index Fund Investor Shares (VHDYX) for dividend stocks
    Vanguard Long-Term Investment-Grade Fund Investor Shares (VWESX) for corporate bonds

    Splitting money 50/50 between these two funds will create a fairly safe portfolio that has nearly 4% yield.

    Another two solid funds that focus on income and have low expenses and great very long-term history:
    Vanguard Wellington Fund Investor Shares (VWELX) — slightly riskier and with lower yield but more long-term growth
    Vanguard Wellesley Income Fund Investor Shares (VWINX) — very safe but don’t expect much growth on top of yield

    • Financial Advice for Young Professionals says:

      If you’re re-investing dividends and interest, you’re not really getting revenue from this are you?

  • Financial Advice for Young Professionals says:

    I invested about $500 in P2P lending a year and a half ago. I use specialized criteria to invest in the riskier loans and I’ve gotten about 14% returns. Probably going to invest a couple grand more since it’s worked out so well so far.

  • MoneySmartGuides says:

    I have slowly begun to build my income portfolio. I’ve learned exactly what you say: it takes years to build. Right now I am focusing on building it up to pay for a few bills every month to eventually allowing me to live off it. All of the investments you point out are a great way to diversify your income streams.

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