One of my favourite things to point out on this blog is that personal finance is deeply personal. What works for someone else may not work for you. With that in mind, I have decided to create a new post series aimed at tracking a new approach of mine, my Income Portfolio. This portfolio is designed to provide me with additional income, which will (hopefully) increase over time and allow me to become more financially independent. I must mention that this portfolio represents a small portion of my invested assets.
What is an Income Portfolio?
An income portfolio is designed to provide income to the investor. This income is derived from dividends, interest on bonds and loans and capital gains. Unlike a standard portfolio where the object is to maximise capital gains via price appreciation, the object of an income portfolio is to provide additional cash to the investor.
Anyone familiar with compounding will know that the most productive use for the income produced is reinvestment into the portfolio, but this is not always the case. Some people may choose to spend the income provided, others may cut back their work hours as the income from the portfolio provides them with additional flexibility. How you use the income is up to you. I plan to re-invest the income in order to compound over the long term, with the ultimate end goal of generating enough income to retire if I choose.
Why an Income Portfolio?
Although the answer to the above question might seem easy (to generate extra income), it is not necessarily straightforward. Investing in an income portfolio will not provide me with the best rate of return. I have not maxed out my pension contributions which qualify for income tax relief, which would provide me with an instant return of 66.67% (more on this in a future post), but I am not investing in this portfolio for a maximum return.
In order to maximise return via my pension contributions, I would have to commit to that additional investment each month. In my current situation (about to purchase my first home), my expenditure isn’t as uniform as it usually is. My income portfolio is funded with additional funds I have left at the end of the month. It is flexible and does not require a firm financial commitment. Don’t get me wrong, once my expenditure normalises in the future I plan to take advantage of additional pension contributions, but for now, an income portfolio will do.
My Initial Investment and What’s to Come
To start the fund, I have invested €176. An odd amount I know, I had planned on investing €150 but needed a bit more in order to pick up an extra stock. In the next post in the series, I will talk about my criteria for picking which stocks make it into the income portfolio. Don’t be expecting the usual $T (AT&T), $JNJ (Johnson and Johnson) or $PG (Proctor & Gamble) right off the bat. Maybe someday one of these will feature in my portfolio, but as of now none of them meets the criteria I am looking for.
Over the coming months, I plan on contributing more to this fund, along with monitoring the market for new opportunities. This fund is flexible, I am willing to invest in more than stocks, but with bond returns as low as they are currently, the portfolio will be stock-focused for the foreseeable future.
There are various topics I want to cover in this series (apart from the stock-picking criteria) including how I track the portfolio, how I screen for the criteria I am looking for and regular portfolio updates.
I hope this series will be helpful to you, but as with all things on this blog, it is not investing advice. I hope my approach will spark some ideas for your own portfolio, and as always, do your research before you invest.
The Stoic Trader.