Income Stream 2 - Eight Portfolio Income Ideas to start NOW!

Portfolio & Dividend Income

Now, we focus our search light on portfolio and dividend income, the next two in the Income Stream series.

Portfolio Income refers to income received from investments and capital gains. Dividend Income is income received from dividend pay outs from companies’ dividend pay outs. If you own shares, you may also receive income from dividends, which are effectively a portion of a company’s profit paid out to its shareholders. Portfolio Income also encompasses dividend income, which is why I will be looking at the two of them together.

When talking about portfolio income, as the name implies, it is a cluster of investments in a portfolio which can be managed directly by you as an investor, or by a professional. So let us get straight into this. I will try and keep it really simple so we can easily understand it.

Let us look at 8 different investments you can have in your portfolio and be smiling to the bank on a regular basis. The beautiful thing about portfolio income stream is that you can easily take it on alongside your business or day job. The first three that I will share are typically referred to as low risky investment and hence attract lower returns.

1. Cash - Cash investments include everyday bank accounts, high interest savings accounts and term deposits. They typically carry the lowest potential returns of all the investment types. While they offer no chance of capital growth, they can deliver regular income and can play an important role in protecting wealth and reducing risk in an investment portfolio. Typically, You should wait to begin investing in other longer tenured assets until you have built up enough savings to allow you be comfortable with emergencies, health insurance, and expenses. Only then should investing be conducted. You can use your bank's internet and mobile banking to set up any of these at your convenience.

2. Treasury Bills - The Nigeria Treasury bills are government-guaranteed debt instruments issued by the CBN on behalf of the Nigerian government. Anyone can apply for treasury bills. You can apply through authorized dealers including Banks, etc. The rates are relatively low because of the very low risk nature of the bills. Government can increase or decrease offer based on the borrowing needs.

3. Bonds – In this kind of investment, you are lending money to the company or government that issues it and earn a rate of interest in return. You have many choices when it comes to bonds. You can own government bonds, corporate bonds, savings bonds, or others. There are saving bonds you can start making investments in with as low as N5,000 here, in Nigeria and I am sure you can find same no matter the country you are in. However, I will advise you not to buy bonds with maturities of longer than 5 to 8 years because you face duration risk.

4. Mutual Funds – This is a pool money from the investing public and use that money to buy other securities, usually stocks and bonds. The profit derived from the diversified pool of investments are shared to investors in the funds annually or biannually or as stipulated in the fund prospectus. Some popular ones in Nigeria include: Stanbic IBTC Nigerian Equity Fund, FBN Money Market Fund, Zenith Equity Funds, United Capital Balanced Fund, ARM Aggressive Growth Fund.

5. Shares – In this type of investment, you purchase the shares of a company when it is offered for sale through the stock exchange predominantly. With a stock, you own a slice of the business. Shares are considered a growth investment as they can help grow the value of your original investment over the medium to long term. Of course, the value of shares may also fall below the price you pay for them. Prices can be volatile from day to day and shares are generally best suited to long term investors, who are comfortable withstanding these ups and downs. Also known as equities, shares have historically delivered higher returns than other assets, shares are considered one of the riskiest types of investment.

6. Real Estate - Property is also considered as a growth investment because the price of houses and other properties can rise substantially over a medium to long term period. However, just like shares, property can also fall in value and carries the risk of losses. It is possible to invest directly by buying a property but also indirectly, through a property investment fund.

7. Angel Investment – This is when you make investments in business (es) based on observed fundamentals and expecting a huge returns in a number of years, typically 5 years. You need to do your due diligence, understand the market trends, the character of the business owner, the share of the business in question vis a vis what you are putting in, etc

8. Crowd investment – This refers to crowdfunding via different platforms. I wrote on this earlier, but you can still check it out on my blog. Here, you are a part of a group making investment in a project/product/service and expecting returns from it. It is very risky, considering the fact that the project can fail at any time. There are very common ones available in different sectors including farm, real estates, service businesses, etc

Risks VS Returns

Investing can be a highly effective way to grow your money and build a foundation for the life you want to create for yourself. However, you need to be aware of the risks involved in the different types of investment and then adopt a strategy, because it is possible to lose all your money in on failed investment!

All investments carry some risk due to factors such as inflation, tax, economic downturns and drops in particular markets. Different types of investments carry different levels of investment risk, and also different returns. As a general rule, the larger the potential investment return, the higher the investment risk. Cash provides lower returns and a lower risk of loss, while growth investments such as shares may provide higher returns and are higher risk.

How do you manage the risk then?

To minimise your exposure, you need to consider the following points:

• Timeframe: The longer you stay invested, the less investment risk you are exposed to because fluctuations in the value of your investment will even out over time.

• Understand your risk appetitie/tolerance: If you’re not comfortable with a certain type of investment, or a certain level of risk, it’s not worth investing in that product.

• Diversify, Diversify, Diversify - Spreading your money across different types of investments rather than relying on one asset class may help shield you from drops in particular markets and deliver more consistent returns over time.

• Information on Fundamentals: The more you understand about investments and financial markets, the better you’ll become at selecting investments that are appropriate for you.

What If I am a Beginner?

The biggest misconception about investing is that it’s reserved for the rich.

That might’ve been true to some years ago. But that barrier to entry is gone today, knocked down by companies and services that have made it their mission to make investment options available for everyone, including beginners and those who have just small amounts of money to put to work.

In fact, with so many investments now available to beginners, there’s no excuse to skip out. And that’s good news, because investing is the best way to grow your wealth. Arm yourself with the right knowledge, understand your risk tolerance level and then deal!!

How do you reduce risk and increase reward with no experience?

My honest advise is to

• Engage professionals to advice you

• Make extensive research before making investments

• Diversify, diversify, diversify

• You can easily make your investment through any investment app, like the Iinvest app.

• Use Robo Advisors

• Invest in Mutual Funds

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Ezinne