Introduction to Income Portfolios
An income focused portfolio is a collection of investments in a brokerage account that are focused on returning income in the form of dividends and interest, but will probably not grow at the same rate as growth focused investments. The goal of an income focused portfolio is to create a lower volatility income stream which can serve as “passive income” for retirement. There are many types of investments that could be used to build a portfolio, but I’ll do my best to cover the most popular and the ones that I’m focused on while I build my portfolio.
High Dividend Stocks
There are many stocks that have high dividend yields and low volatility that are a great fit for an income portfolio. Utility companies, as an example, are often referenced as relatively safe investments due to their business model and consistent cash flow. They often pay relatively high dividend yields.
The watch-out or risk that I’ll share here is that high dividends don’t always equate to a healthy business so don’t choose your investment only because of a high dividend. Often a high dividend yield is a pre-curser to a company either lowering their dividend or cutting it all together. Make sure you do your homework and only invest in solid companies that have good dividend yields for this portfolio.
Bonds and Bond Funds
Bonds aren’t the most exciting investment vehicle out there, but I do think they have a place in an income focused portfolio. Not only are they more stable than most equity investments, but they now (in 2024) have interest rates that are much healthier than recent history. I personally invest in Bond funds, but I know there are options for investing directly into bonds that can be even more beneficial.
Real Estate Investment Trusts (REITS)
These are my favorite investment vehicles for income focused portfolios. Real Estate Investment Trusts (often referred to as REITs) are investments made up of only real estate and they pay a high dividend. Historically REITs perform at or better than stocks over the long run and have much less volatility which makes them a really popular choice for income focused portfolios. You can find REITS that are broad market focused and REITS that are focused on specific niches like hospitality, retail and even self-storage. It’s a pretty large asset class with plenty of options depending on your interest.
Income Funds
This category is high risk, but also has an opportunity for high reward, but income funds often are ETFs or funds focused on maximizing income usually in the form of a very high dividend yield driven from trading equity derivatives. Often these funds have +8% dividend yields and pay out monthly. The pros are these funds typically perform better in sideways moving markets providing some diversification to high growth funds. The cons are that the income is usually taxed at short term gains and some of these funds have high expense fees. I personally believe there is a place for these funds in my portfolio, but as part of a broad diversified portfolio and not a single investment.
Other things to keep in mind when building an Income Portfolio
Dividend Reinvestments
While you are in building mode, I suggest reinvesting your dividends to get the real benefit of compound growth. I’m personally a fan of setting up my dividends to automatically reinvest, but I know others like to control where they reinvest their dividends so they manually chose accounts to reinvest once they get paid. Either way, take advantage of the compounding while you can and resist the urge to spend!
Taxes
Dividends trigger taxes and it’s important to plan for the extra tax burden you will owe Uncle Sam when benefiting from an income-based portfolio. Some people tend to only leverage tax advantaged accounts to create income portfolios (IRAs and 401ks), but I like to split between taxable and tax advantaged because I am building a portfolio that will sustain me before I reach an age where I’ll be able to take advantage of my tax advantaged accounts.
