What is Portfolio Income?

March 27, 20224 min read
What is Portfolio Income?
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Key takeaways

  • Portfolio income is a form of passive income that is generated by investments in financial instruments.
  • The amount of passive income to target is a function of one’s financial needs, and is constrained by the amount of invested assets.
  • Alternative assets can help complement your portfolio by giving you access to sources of passive income that tend to have a more limited correlation to public markets.

Portfolio income as a form of passive income

Active income, also known as earned income, is defined as wages, salaries, tips or bonuses earned from doing a job or providing a service. The average tax rate on active income varies from 10% to as much as 37%, depending upon your income level. Passive income, on the other hand, requires only minimal labor to be maintained. An example of this would be income resulting from profit distribution from a limited partnership interest in a firm, book or music royalties, rental payments and cash flow from investments. The tax rate on passive income is generally in the 10% to 15% range. 

Portfolio income is considered to be a form of passive income that is specifically derived from the ownership of financial instruments.  Portfolio income is subjected to a tax rate of up to 20%. 

Examples of portfolio income

Interest – Let’s say you have a traditional savings account, a money market account, a certificate of deposit  or a bond. The interest payments you receive in exchange for lending your money are considered portfolio income. 

Dividends – As a shareholder in a publicly traded company, you may receive a dividend under a certain set of circumstances. As an example, if you own 100 shares of the Alpha Bravo Charlie Corporation, and the company decides to pay a dividend of USD 1 per share, you’ll receive a USD 100 dividend payment. 

Capital Gains – Now, let’s say you’ve decided to sell your 100 shares of Alpha Bravo Charlie, which you purchased at USD 5 per share. On the day of the sale, Alpha Bravo Charlie is trading at USD 20 per share. The USD 1,500 profit (USD 15, times 100 shares) is considered a realized capital gain, which also has a special taxation regime in the US. 

Any long-term investment strategy should have beating inflation as its main goal. As company earnings tend to reflect increases in prices, equity investments are seen as a traditional hedge against inflation, through both dividends and capital gains. 

The main potential downside of equity investments is short-term market volatility. Diversifying your portfolio with bonds may help achieve more steady returns through fixed income interest payments. 

How to earn portfolio income

Step 1 – The first step toward earning portfolio income is to determine how much monthly income you’d like to earn from your portfolio. Other relevant questions that can help framing the issue are how the portfolio income will be spent, if it is intended to cover part of your monthly expenses. You also want to determine the timeframe of your income needs.

For instance, if you do not have immediate liquidity needs you can have access to higher yielding products by harnessing duration.  

Step 2 – The following step is to choose a targeted yield for the portfolio, which should reflect your needs. That, in turn, will help you figure out where to allocate your money to   increase the likelihood of realizing that goal. 

Your target return will help you determine how much money you need to invest, over what time horizon and the type and mix of investments to include.

A 5% return on a USD 1000 investment will earn you USD 50 annually. Typically, higher potential returns reflect higher risk, though there is scope for identifying investment opportunities where this risk is mispriced – for instance, if most market participants are overestimating risk. This is why due diligence is extremely important in both private and public markets, but tougher in the former as there is more limited public information. 

Step 3 – When it comes to choosing your portfolio asset allocation, there is a wide range of asset classes from which to choose. These include savings vehicles such as certificates of deposit, savings accounts and money market accounts, as well as bonds, loans, dividend-paying stocks, preferred stocks, and REITs. There are other investment vehicles which can be a combination of these instruments, such as mutual funds and ETFs.

Each one of these assets has a different risk-return profile, and an investor should determine if it is an appropriate choice for his portfolio given the return requirements and his/her willingness and ability to withstand volatility.  

Allocations to alternative investments can help diversify your portfolio, and obtain passive income from assets that are less correlated to public markets. 

Step 4 – Now that you’ve determined how much you would like your portfolio to return on an annual basis, and you’ve established a targeted return and chosen the assets you want to include, it’s time to figure out how much cash you need to invest. 

For instance, for a monthly income of USD 5000 – USD 60,000 annually – if your target return is 5%, you’ll need a USD 1,200,000 portfolio to generate that return.  

Step 5 – It is critical to get into the habit of reinvesting part of the portfolio income received along the way. This will enable you to harness the power of compound interest. It is also a good idea to keep investment costs low – by, for instance, avoiding frequent day trading – as excessive costs tend to eat up returns.
Yieldstreet’s offers seek to generate income by investing across private asset classes such as art finance, commercial finance, consumer lending, legal finance, real estate, and corporate finance.

We believe our 10 alternative asset classes, track record across 470+ investments, third party reviews, and history of innovation makes Yieldstreet “The leading platform for private market investing,” as compared to other private market investment platforms.

1 Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections may not reflect actual future performance. All securities involve risk and may result in significant losses.

3 "Annual interest," "Annualized Return" or "Target Returns" represents a projected annual target rate of interest or annualized target return, and not returns or interest actually obtained by fund investors. “Term" represents the estimated term of the investment; the term of the fund is generally at the discretion of the fund’s manager, and may exceed the estimated term by a significant amount of time. Unless otherwise specified on the fund's offering page, target interest or returns are based on an analysis performed by Yieldstreet of the potential inflows and outflows related to the transactions in which the strategy or fund has engaged and/or is anticipated to engage in over the estimated term of the fund. There is no guarantee that targeted interest or returns will be realized or achieved or that an investment will be successful. Actual performance may deviate from these expectations materially, including due to market or economic factors, portfolio management decisions, modelling error, or other reasons.

4 Reflects the annualized distribution rate that is calculated by taking the most recent quarterly distribution approved by the Fund's Board of Directors and dividing it by prior quarter-end NAV and annualizing it. The Fund’s distribution may exceed its earnings. Therefore, a portion of the Fund’s distribution may be a return of the money you originally invested and represent a return of capital to you for tax purposes.

5 Represents the sum of the interest accrued in the statement period plus the interest paid in the statement period.

6 The internal rate of return ("IRR") represents an average net realized IRR with respect to all matured investments, excluding our Short Term Notes program, weighted by the investment size of each individual investment, made by private investment vehicles managed by YieldStreet Management, LLC from July 1, 2015 through and including July 18th, 2022, after deduction of management fees and all other expenses charged to investments.

7 Investors should carefully consider the investment objectives, risks, charges and expenses of the Yieldstreet Alternative Income Fund before investing. The prospectus for the Yieldstreet Alternative Income Fund contains this and other information about the Fund and can be obtained by emailing [email protected] or by referring to www.yieldstreetalternativeincomefund.com. The prospectus should be read carefully before investing in the Fund. Investments in the Fund are not bank deposits (and thus not insured by the FDIC or by any other federal governmental agency) and are not guaranteed by Yieldstreet or any other party.

8 This tool is for informational purposes only. You should not construe any information provided here as investment advice or a recommendation, endorsement or solicitation to buy any securities offered on Yieldstreet. Yieldstreet is not a fiduciary by virtue of any person's use of or access to this tool. The information provided here is of a general nature and does not address the circumstances of any particular individual or entity. You alone assume the sole responsibility of evaluating the merits and risks associated with the use of this information before making any decisions based on such information.

9 Statistics as of the most recent month end.

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