Ways of Generating Investment Income
Investment income is the type of income that can be described as cool income as it doesn’t require much of your physical attention. If you like, you can call it passive income or portfolio income. Unlike salary income which you will need to put in several hours before you can earn it, investment income is mostly a reward of your past labour. Depending on the type of assets in your investment income portfolio, you may go and sleep after you have invested your money. You will only need to wait for your income to keep rolling in.
Types of Investment Income
There are different types of investment income and these include income from interest, dividends, rent and capital gains. If you want to earn any of these investment income, you will need to invest in the appropriate assets. For instance, if you want to be receiving dividends, you will need to invest in stocks. You cannot put your money in a bank account and expect to get dividend at the end of the year. Even if the bank make much profits at the end of the year and decide to pay dividends to its shareholders, you will not be able to share out of the bank’s profits in term of dividends. So, for clarification, I will like to explain in more details below the different ways you can use to generate investment income.
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Dividends
If your objective is to earn dividends as investment income, then you will need to narrow your choice of stocks to income stocks. You should not make the mistake of believing that once you buy stocks, that you should be expecting dividends. Investing in stocks does not work that way. There are different types of stocks. For example, if you buy growth stocks, such company may not declare dividend at all at the end of the year. This does not mean that the company does not make profits. But instead of sharing the profits to the shareholders, the company will rather re-invest the profits into the company to finance its growth. Therefore, if you want to enjoy dividend income, you need to identify companies that are reputable in paying out dividend consistently. This type of stocks is called income stocks. They are good for people who don’t want to take much risks. Income stocks are usually the toast of the retirees or individuals who want to supplement their income. If you are looking for income stocks, some of the characteristics you should watch out for are; large capitalization, good cash flow, consistent earnings growth, high dividend yield and good dividend payout ratio.
Rent
If you invest in real estate, you can receive rent as investment income if you don’t occupy the property by yourself. You can lease the property either for a short or long term. You will then collect rent either monthly or yearly depending on the agreement you have with the occupiers. While enjoying your rent, you still retain the ownership of the property.
Interest
Interest income is what you get in return when you put your money into a savings account or fixed deposit. Just the same way you will need to pay interest if you borrow a loan from the bank, banks also pay you interest on the amount you place with them. The rate of interest that banks will pay you will be lower than the rate of interest they will charge anybody who borrows money from them. The difference between the rate of interest they charge their customers and what the pay you represents a profit to them. Apart from putting your money in the bank, you can also consider the option of buying Treasury Bills or Bonds. They have fixed interest rates too but the interest rate on bonds may be higher than that of Treasury Bills.
Capital Gains
Another way of generating investment income is by buying assets that have potential to appreciate in value. There are many ways by which you can enjoy capital gains. It cuts across different class of assets. The rationale behind capital gains is that you are buying an asset at a low price and then sell the same asset when the price has risen to a higher price. If the price of the asset you bought has increased, the difference between your selling price and the purchase price is capital gain. This applies to stocks and real estates. You can also sell the bond you invested in before it matures. If the value of the bond has increased, you will enjoy capital gains.
A good creative way of having a balanced income investment portfolio is to invest in Trust Funds. When you invest in a Fund, you will not need to invest directly in stocks, bonds or real estates. The Funds will help you allocate your investment appropriately. Some funds invest in different types of assets such as stocks, bonds and other instruments.
How to Choose the Right Investment Income
You may need to take certain factors into consideration before deciding on the investment income that will be right for you. Basically, I will talk about two factors here.
Risks: Just like any investment, each of the above listed investment income has its own risks. Therefore, you need to consider your attitude to risk. For instance, investing in growth stocks attracts higher risks than investing in income stocks. You should only invest in an asset that matches your risk appetite.
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Taxation: Each investment income has a specific tax rate attached to them. The tax rates are higher than one another. Therefore, you should not just look at the rate of returns you will enjoy on a particular class of asset. What should interests you most is the investment income you will get after tax has been deducted. If you invest $5,000 in an asset that yields twelve per cent return while the applicable tax rate is ten per cent, your real investment income will be $540. That is, $5,000 x 12% minus 10% tax. This is $600 – $60 = $540.