Portfolio income is income from investments, dividends, interest, and capital gains. Royalties received from property held for investment is also considered portfolio income. Portfolio income does not come from passive investments and is not earned through regular business activity. Typically, income from interest on loaned money is not considered portfolio income.
Alternative Income ETFs and Your Portfolio
Breaking Down Portfolio Income
The three main categories of income are active income, passive income, and portfolio income. These categories of income are important because losses in passive income generally cannot be offset against active or portfolio income.
Ways to Increase Portfolio Income
- Purchase High-Paying Dividend Stocks: Investors can increase their portfolio income by buying stocks that pay an above-average dividend. Companies may raise their dividend payments as revenue and profit increase. Dividend payments can be paid directly to the shareholder or used to purchase additional shares in the company, referred to as a dividend reinvestment plan (DRIP). For example, a company may pay a cash dividend of $2 per share annually, therefore, if the investor has a holding of 200 shares, he or she would receive a cash dividend payment of $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. This index includes 396 stocks that have high dividend yields. Other popular selection criteria for dividend ETFs focus on how many years the company has paid a consecutive dividend and companies that have a history of increasing their dividend payment 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 Apple Inc. and the stock is trading at $175; they could agree to sell their 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. Therefore, 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 Apple is trading below $192.50, allowing the investor to keep the premium with no further obligation. However, If Apple is trading above the strike price on the day the option expires, the investor is obliged to sell their shares to the buyer of the call option at $192.50, which means they receive $19,250 ($192.50 x 100 shares), plus the $200 options premium.