There are ways to significantly increase your portfolio income. In a world of near 0% interest on CDs, that’s good news. Here are my top 3 tips on how to do it:
1. Callable CDs
If you have no appetite for risk, you’re probably a CD buyer. But if you are a CD buyer, you’re probably very frustrated with the infinitesimal interest rates being offered. Well, the good news is you can earn a lot more interest by purchasing callable CDs. These are long-term bank deposits that pay investors much higher interest. The catch is that you tie up your money for a very long time. Not only that, the deposits are callable. That means the bank can pay you back your money at certain intervals and then stop paying the interest. When would a bank call the CD? When interest rates go down. Seeing as how it’s almost impossible for rates to drop further, the odds of having your CD called are low.
The bigger risk with these deposits now is if they don’t get called. That’s because if they don’t call the deposit, you’ll be stuck with a very long-term investment paying very low rates when (not if) interest rates rise. As you can surmise, I’m no fan of these investments, but it is one way to get a heck of a lot more interest than current CDs pay.
2. Preferred Shares
What are preferred shares? They are a hybrid investment — something between a common share and a bond. Preferred shares are like bonds in that they have a stated interest rate the company pays. They pay higher dividends than common shares do, and share values don’t fluctuate as much as common shares do. That’s because the interest payments preferred shares pay keep the prices more stable.
The downsides of preferred shares is that they rarely get the upside growth that common shareholders earn, and they carry more risk than bonds. That’s because the bond holders get paid before preferred shareholders get paid. In fact, the companies have no obligation to pay the preferred share interest. That’s the risk the preferred shareholders take, and that’s why the preferred shares get very high interest. Still, if your main goal is portfolio income, these can be attractive.
3. Growth Portfolio
This is one of my favorite ways to generate portfolio income – and it’s one of the least utilized methods. Using this approach, you create a portfolio that fits your risk tolerance and you withdraw 4% every year. You can withdraw that income on a monthly, quarterly or annual basis. But you take the money out no matter what the portfolio earns.
Sometimes you earn much more than 4%. In those years, your portfolio grows because you only withdrew 4%. Other years, you’ll earn less than 4% or even lose money. In those years, you still withdraw 4% of the value. (In those years, since the value is lower, your 4% withdrawal is lower than the previous year because the account value is lower. That’s the best way to cope with withdrawal strategies in a bear market.
This is a great strategy for folks who are interested in very long-term portfolio income and the best income investments. In fact, multiple studies show that this strategy is by far the best way to create income over many years. It’s the best way to grow your income to overcome inflation. And over a very long period of time, you simply must create income that grows as inflation grows.
What are you doing to increase your portfolio income?