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Portfolio income refers to money earned on investments such as stocks and bonds. Portfolio income is one of the three main types of income individuals can earn. For most people, portfolio income plays an important part in their retirement planning.
Active, passive and portfolio income are the three main types of income that most people have. Active income is the income that a person earns from his job or from work that he physically must be doing. If the person stops doing the work, the active income stops.
Passive income refers to income that is earned automatically. If the person stops working, the income keeps coming in. This type of income may be earned from royalties on a book, for example, or from rental income on a rental property.
Finally, portfolio income is income earned on money that has been invested in things that pay a return. When a person invests in stocks, bonds and mutual funds, his group of investments is called a portfolio. This portfolio may be kept in one brokerage firm or in several brokerage firms or it may even be kept in a 401K established by an employer.
Those investments in the portfolio earn income — or a return on investment — in several ways. The investments earn income if the stock, bond or mutual fund rises in value. Interest may be earned on the investments in the case of bond investments, such as municipal bonds in which an investor buys government debt and the government pays him back with interest at a given rate.
Finally, investments may earn income through dividends. Dividends are monies paid by a company in which the company shares some of its profits with shareholders. Dividends are paid out on a per-share basis. For example, a company may pay a dividend of $0.06 US Dollars (USD) per share.
When the investments earn money, the investments grow. Each year, the investments should ideally grow at a given rate. This money that is earned each year is considered investment income.
Those who are retired may depend on their investment income as a part of their regular monthly income. Ideally, most experts suggest being able to live off the investment income alone and not touch the principal that is invested. If the principal is removed from the account or reduced, this reduces the amount of money invested, which leads to less interest income since there is less money to earn such income.