This post originally appeared on The Financially Independent Millennial and has been republished with permission.
Are you like many, wondering how to generate income from a portfolio? It can seem like a daunting question, but the answer is resoundingly simple.
Ways to Generate Income from a Portfolio
As you know, your financial independence number is an estimate of how much you need to live off (the dividends) generated by your portfolio, forever.
In short, one of the easiest ways to generate retirement income is by investing in stocks. In particular, stocks that pay dividends. Investing in a dividend portfolio can be an incredibly valuable income-producing tool in retirement!
First, a dividend is CASH paid to you by companies just because you own the stock. Then, the company stock is held in your retirement portfolio and generates dividend income. Third, these dividends are usually paid on a monthly, quarterly, or annual basis. Lastly, healthy companies generally aim to increase the dividend regularly–this helps inflationary concerns.
Here’s a list of 28 companies in the United States that pay a healthy dividend. These numbers are valid from the market open on March 5, 2019.
If you were to buy an equal proportion of these companies this morning, you would expect an average yield of 4.59%. For example, $4,590 annually for every $100,000 invested. Of course, this is an equally weighted retirement income portfolio.
This is the income generated in your retirement portfolio! For example, with $1,000,000 invested, you would expect $45,900 annually or about $3,825/mo.
Sample Dividend Portfolio – Your Income in Retirement
|Company||Yield as of March 5, 2019|
|Altria Group (NYSE:MO)||6.21%|
|Campbell Soup (NYSE:CPB)||4.26%|
|China Mobile (NYSE:CHL)||3.91%|
|China Petroleum & Chemical (NYSE:SNP)||4.82%|
|Exxon Mobil (NYSE:XOM)||4.18%|
|Fibria Celulose (NYSE:FBR)||8.19%|
|Gilead Sciences (NASDAQ:GILD)||3.47%|
|JPMorgan Chase & Co. (NYSE:JPM)||3.05%|
|Lamar Advertising (NASDAQ:LAMR)||4.74%|
|National Retail Properties (NYSE:NNN)||3.80%|
|Royal Bank of Canada (NYSE:RY)||3.71%|
|The Coca-Cola (NYSE:KO)||3.45%|
|The Western Union (NYSE:WU)||4.26%|
|Verizon Communications (NYSE:VZ)||4.23%|
|Wells Fargo & Co (NYSE:WFC)||3.67%|
Disclaimer: Notably, this portfolio is for educational/informational purposes only as we’re not providing stock suggestions. Rather, we’re displaying the income potential from this sample retirement portfolio as of March 5, 2019. Always invest with the advice of a professional.
In short, bonds are a debt instrument. Someone, or a country, decides to borrow money from people, and sell bonds. In exchange, the bond seller pays interest to the bondholder (you). Indeed, you’ll hold the bond in your retirement account, and it’ll become part of your portfolio. This interest is income that you can live on.
For example, Canada might sell a 10-year bond that comes with a 3% interest rate for $100 (when it’s issued). You can buy this bond, and collect 3% interest, every year for 10 years. Companies of all sizes also sell bonds. So, depending on the bond seller, it could be one safe way to generate income in retirement.
Selling Call Covered Calls
Another way to generate income from a portfolio is to sell covered calls. In a nutshell, here’s how it works. Say you have 100 shares of Apple. The current price of one Apple Stock is $130.00. That means your Apple shares are worth $13,000. You can sell a contract that gives the right, but not the obligation, for someone to buy your Apple shares from you, in the future, at a price that you agree on. And in exchange, that someone will happily pay you money, for you to keep, regardless of what happens. That’s the covered call.
Here’s a hypothetical example. Today is December 13, 2020. And, you decide to sell an Apple covered call to someone, for $2.00. The call option expires January 18, 2021, and comes with a strike price of $148. In this case, you get paid $200.00 ($2.00 * 100 shares), and this is yours to keep.
Fast forward to January 18, 2021 and Apples shares are selling for $145.00, below your strike of $148. Then, nothing happens. Your contract expires worthless, and you keep your $200. That’s your option premium income.
Again, fast forward to January 18, 2021, and Apple shares are selling for $160, above the strike price. If this happens, the option contract holder will pay you $14,500 for your Apple shares ($145 * 100). And, you still get to keep your $200. It may, however, trigger a capital gain.
Either way, it’s a payday.
What If You Don’t Want to Sell Your Apple shares?
If you’re in scenario 2, and Apple shares are selling for more than your strike price, you might decide that for whatever reason, you don’t really want to sell your Apple shares. If this is the case, you’ll have two options:
- You could buy back the call option.
- Or, You could just buy back 100 shares of Apple at the current price.
If selling your shares isn’t something that you’d like to do, then you might consider selling put options to generate monthly income.
Sell Cash Secured Put Options
Another way to generate income from a portfolio is to sell cash-secured put options. Similar to call options, put options are a contract that allows the buyer the right, but not the obligation, to SELL your shares at a predefined price, before a certain day.
For example, you might believe that Apple can’t possibly go down in the next 90 days. And, Apple shares are selling today, for $145. So, you might decide to sell a Put option on Apple with a strike price of $130 that expires January 18, 2021. In exchange, you’ll receive a $200 premium for this contract ($2.00 * 100).
If on January 18, 2021, Apple shares went down in value, and are now selling for $135 (Still, above the strike price), then nothing happens. You keep your $200 premium, and the contract expires worthless.
If on January 18, 2021, Apple shares tank, and now sell for $125, then, the contract buyer will sell you 100 shares of Apple for $130 each. However, the $200 premium is always yours to keep. In this case, you’ll have a paper loss of $800 (-$13500 + $12500 + $200).
Of course, if you were forced to buy shares, you could always sell covered calls on them!
Investing is always risky, so, be sure to consult with your financial or investment advisor for personalized financial advice!
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