Broadly speaking, there are two ways to derive value from a stock portfolio: growth and income. For growth, this happens when the value of the stocks in a portfolio increases in price, and the portfolio's overall value rises, generating a positive return. For income, the portfolio generates positive cash flows through dividends or interest payments.
Here, using my own experience from last year, I'll discuss how a portfolio can generate over $10,000 in income annually and how to optimize that portfolio to increase its income-earning potential even further.
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A portfolio full of income-generating stocks
First, I should note that the portfolio I will be discussing is designed to generate income. This approach isn't for every investor. For example, younger investors might prefer higher returns offered by growth stocks rather than the cash flows from owning value-oriented dividend stocks. Every portfolio is different; this is just one example.
That said, the portfolio I'm covering is loaded with dividend-paying stocks. Among the top holdings are companies like Altria, PhilipMorris International, InternationalPaper, IBM, and AT&T.
Indeed, many of the stocks listed above have dividend yields above 5%. Altria, for example, has a dividend yield of 9.5% -- meaning that a $20,000 investment in Altria shares should generate $1,900 in annual dividend income.
Of course, this isn't always the case. That's because dividends aren't set in stone. Companies can and do reduce them on occasion. For example, AT&T cut its dividend by 47% in 2022 despite raising it for 35 straight years.
The lesson for investors? Spread your risk and do your homework. By owning many different dividend stocks, investors can gain much-needed diversification -- meaning one stock slashing its dividend won't impact your entire portfolio. Furthermore, investors can hopefully avoid dividend cuts by researching which companies have the means to continue paying dividends.
Look for companies with strong balance sheets -- lots of cash, minimal debt, and plenty of free cash flow.
How to increase portfolio income this year
In short, my plan for this year is to simply sharpen the wheel. In investing terms, that means reviewing the holdings and looking for opportunities to increase income.
Here's an example: The portfolio in question currently has about 30% in cash.
Now, cash isn't a terrible income-generating asset at the moment. In fact, this account receives about 5% interest on cash. That's solid for a risk-free asset. And since inflation has come down over the last year, it means the cash balance in the portfolio isn't losing value in real terms.
However, there are ways to get more income from cash. One way I'm exploring is putting that cash to work in several income-producing exchange-traded funds (ETFs). Specifically, I'm looking at JPMorgan Equity Premium Income ETF(NYSEMKT: JEPI) and iShares International Select Dividend ETF(NYSEMKT: IDV).
The JPMorgan Equity Premium Income ETF uses a covered call strategy (an options method that generates income by selling option premiums) to boost income from stocks that may or may not pay dividends at all. For example, one of the fund's top holdings is Amazon -- a stock that has never paid a dividend. By selling option premiums, the fund can trade off some upside in the stock for a steady stream of option premiums that is converted to income for the fund holders.
The iShares International Select Dividend ETF uses a more traditional income-producing strategy. Its top holdings include large-cap foreign stocks that pay dividends: RioTinto, BritishAmericanTobacco, and BHPGroup.
This portfolio already owns both funds and adding to them would boost the annual income -- perhaps by as much as 10%.
In summary, every portfolio is different. And not all investors should focus on boosting portfolio income. However, a diversified collection of dividend stocks can provide a steady stream for those seeking additional portfolio income. Moreover, by reviewing their holdings and reallocating money to higher-yielding stocks and ETFs, investors can ensure their money is working hard for them. And that's a great way to keep the cash flowing for many years to come.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jake Lerch has positions in AT&T, Altria Group, Amazon, International Business Machines, International Paper, Philip Morris International, and iShares Trust-iShares International Select Dividend ETF. The Motley Fool has positions in and recommends Amazon. The Motley Fool recommends British American Tobacco P.l.c., International Business Machines, and Philip Morris International and recommends the following options: long January 2026 $40 calls on British American Tobacco and short January 2026 $40 puts on British American Tobacco. The Motley Fool has a disclosure policy.
