4 Strategies to Generate More Investment Income

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“How can I generate more investment income?” That’s a question that’s on a lot of our minds now that the stock market is floating around in record territory.

Whether it goes higher, begins to turn lower, or just floats along in the middle — now is an excellent time to take steps to generate more investment income.

Investment income is like locking in your gains. If your stock portfolio has grown substantially in the past few years, you have the advantage of using the capital to invest in high-yielding assets that will continue to enrich your portfolio, even if stock prices don’t continue to climb.

Think of it as diversifying your returns away from complete reliance on growth.

Here are some smart strategies to generate more investment income from your portfolio.

1. Emphasize dividend stocks.

Dividend stocks are the obvious first place to start looking. You aren’t abandoning stocks at this point, but looking for investments that also pay an above-average rate of return through dividends.

Dividend stocks have at least three advantages:

  1. Above average income
  2. Continued participation in capital appreciation
  3. Some protection against price declines is afforded by the dividend yield

One of the caveats here, is that a stock isn't worth holding simply because it has a high dividend yield. Some stocks can yield well into double-digit percentage returns, but that is often an indication of underlying weakness.

For example, the stock may have recently had a bad run that depressed the price, dramatically increasing the dividend yield. Eventually, the dividend will have to be cut to accommodate the company’s weakened financial state.

If holding individual dividend stocks seems like a crapshoot, you always have the alternative of investing in a dividend index fund. One such fund is iShares Select Dividend ETF. The ETF invests in a wide range of mostly U.S. dividend paying stocks, and has yield of 3.58%.

2. Cut investment expenses.

By default cutting investment expenses is a way of increasing your income. The most obvious way to do this is by working with the lowest cost broker that you can.

Stock transaction fees can really add up if you're an active trader, so you will want to look for a broker that has lowest transaction fees possible.

If you’re a fund investor, you’ll want to pay especially close attention to 12b-1 fees. These are fees that cover the operational expenses of a fund, and since they are charged within the fund — rather than as a direct charge to you — they are easy to miss.

These fees can range from 0.25% to 1% of your fund investment each year. You want to invest in funds that are on the lowest end of the range possible, as a difference of just 0.5% on your investment each and every year can make a substantial difference over a long period of time.

You’ll also want to do this within the framework of working with funds and brokers that do not charge load fees. While these are one-time charges, they can reduce your overall return, particularly if you frequently trade funds.

3. Minimize trading transactions.

One of the best ways to reduce investment expenses is to minimize your trading. If you are looking for your portfolio to provide greater investment income, you’ll want to stay with your investment choices on a long-term basis.

This is when it's important to stick with the investment strategy you've carefully planned out so you can reduce your transactions. The less trading you do, the lower your investment expenses will be, and the greater your investment income.

4. Consider non-traditional investments.

In recent years, many investors have become hyper-focused on stocks. But there are income opportunities outside the stock market, and now is an excellent time to investigate potential opportunities.

Not only is this a way of locating income sources for your portfolio, but it will also function as a needed source of diversification.

Treasury Inflation Protected Securities (TIPS). These are U.S. Treasury securities that come with interest, plus inflation adjustments. The current yield on a 5 year TIPS is 0.91%, which won’t exactly light your portfolio on fire, but not much in the fixed income sector will these days. The beauty of TIPS is that the yield increases with inflation — and that’s what usually precedes higher interest rates. Your yield will improve without you needing to chase higher-yielding investments in a rising interest rate market.

Income property. Depending upon where you live, you may find income properties available at bargain prices. Rental real estate is more risky (and more hands on) than paper investments. But in some areas, prices have been so depressed by the housing collapse that rental property is now a financially viable alternative.

A $150,000 property that can be purchased with a 20% down payment ($30,000) and a $120,000 mortgage at about 4.5%, will have a monthly principal and interest payment of about $608. With $250 added for real estate taxes and property insurance, that’s a total monthly payment of $858. If the house can be rented for $1,000 per month, you’ll have a net positive cash flow of $142 per month, or $1,704 per year. That will represent a return of 5.68% on your $30,000 down payment.

REITs. If you don’t feel like getting your hands dirty with direct ownership of rental property, you can always opt instead for a real estate investment trust, or REIT. We can think of REITs as mutual funds for income producing real estate, so when you buy into one you’re actually investing in a portfolio of properties (or mortgages on those properties).

You can invest in an index type REIT, such as the Vanguard REIT Index Fund (VGRSX). The fund has well diversified holdings and a yield of 3.38%. You can’t even get that on a 30-year Treasury Bond.

What strategy are you implementing to generate more investment income?

Kevin Mercadante

Kevin Mercadante is professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry. He lives in Atlanta with his wife and two teenage kids.

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