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Income Portfolios: Do They Provide Enough to Live Off (and How Passive Are They)?

Passive income takes many forms. Sure, an online business can eventually produce passive income, but it also requires considering the upfront investment of time and money. Investing can provide some income and capital gains to live off if the amount invested is substantial enough. But do so-called ‘Income Portfolios’ really deliver and how can they be constructed? Here are a few thoughts to mull over about income portfolios and whether they’re really passive.


What Income Can Be Realistically Achieved?

You have a choice about whether to use a traditional stock and bond indexing approach to obtain a good income stream or try something else. The traditional approach can work, but when the broad market is paying a low average dividend yield and interest rates are at historic lows too (so bond yields are smaller), then the aggregate income isn’t anything to write home about.

Another approach is to use investments oriented towards a higher income. These invest in a smaller segment of the market and so offer less diversification while doubling down on certain industries. The weighting of a few industries including the industrial, utilities, and financial sectors may give some investors pause for thought, but these are the ones that pay more dividends.

Note that actively managed funds require more oversight, and you need to regularly review their relative performance against the related index.

What Investment Options Show Promise?

The S&P 500® Dividend Aristocrats® Index is a popular one. This shows consistent, higher-paying companies that remain part of the selective S&P 500 index and increased dividends annually for the last 25 years.

The index yield at the end of 2020 stood at approximately 2.57% with a typical index ETF charging investment fees of roughly 0.35%. Comparing the above yield to the total stock market, the yield of the Vanguard Total Stock Market (VTI) ETF was 1.71% in 2020.

When examining the difference between the two equity (stock) based indexing approaches, a 0.86% increase in income yield is achieved. Not much in the scheme of things but when multiplied up by a sizable portfolio value, it begins to make a difference.

Should You Manage the Portfolio Yourself?

Managing investments often make people skittish. There are also other complications such as how tax impacts different investment decisions.

An orientation toward income over capital growth is usually taxed unfavorably, which eats into the possible benefit. This is where it’s useful to work with a financial advisory firm that can provide sensible advice. They can look at what you’re wanting to achieve and how it can work in reality. This rules out unwanted surprises due to poor financial planning. To see what advice can be sought out, take a look at this financial website for answers:

While income investing is a distinct approach that can be passively run, it typically incurs higher investment fees, lower capital appreciation, and often a bigger tax bill too. Protecting money intended for retirement when still wanting to adopt an income-focused approach is where sound advice is needed. This avoids making unnecessary blunders early on that will affect your results later in life.

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