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5 Ways to Increase Your Investment Income

February 16th, 2012 Leave a comment Go to comments

When I started investing for income, my primary goal was to find good companies to invest in. An investment that pays you income is easier to value and much more likely to be an investment that is shareholder friendly. Also, a track record of paying dividends implies that the company manages its finances well.

After investing for a period of time, I have realized that your investment income can be a very powerful tool to increase your spending or supercharge your reinvestment into other companies that are attractively valued. By continuously putting money to work in the market can enable you to get outsized returns by taking advantage of opportunities that develop. Or, you can also just spend the money without selling any shares!

The more investment income you create, the better off your portfolio will be. Here are some tips to increase your investment income.

1) Invest More Money

The first way is the simplest and most obvious. If you simply set aside more money over time to investing, your investment income will increase. For example, let’s say that you invest $50/month. If you increase the monthly amount to $100/month, your income will double all things being equal. To keep the example simple, assume that you invested all the money at the beginning of the year. Here’s a table that demonstrates this:

Annual Income Doubles by Increasing Amount Invested
$50/month…is $600/year. …earns 5% per year Total annual income: $30
$100/month…is $1200/year …earns 5% per year Total annual income: $60

2) Reinvest Your Investment Income

When you earn investment income, it’s money in your pocket that you can do what you want with it. One of the options is to reinvest the money back into additional shares or units. This is a very powerful strategy to make money because you are buying a larger share of an investment without putting any additional money of your own into it. If you choose quality investments, over time the share of income generated by this reinvestment can dwarf the money you put in yourself by compounding. Remember, the additional shares your are able to buy using reinvestment also earn income as well.

Here’s a table that demonstrates this:

Investment Share Count After One Year. (Assume one share is $10)
$600/year… …buys 60 shares Total annual income: $30…buys 3 more shares (total 63 shares)
$1200/year… …buys 120 shares Total annual income: $60…buys 6 more shares (total 126 shares).

3) Get a Raise

If you choose your investments carefully, often times you can make more money because the company raises the dividend or interest income earned. There are many companies that increase their dividend or interest income every year, some for decade after decade. Again, if the investment is high quality, they will be able to responsibly increase the income offered over time because they make more profits, reduce costs, or employ other kinds of actions to increase the amount of income per share or unit they earn.

4) Increase Investment Yield

In the example above, the investment yield was 5%. This is simply the ratio of the income earned divided by the total investment value over one year expressed as a percentage. If you have a higher yield, you earn more money. If the yield is lower you earn less money. When choosing your investments, picking ones with a higher yield will offer the potential of higher income. There are other considerations to think about (such as future earnings growth rate, the company dividend history, etc), but all else being equal higher yield equals more money.

5) Putting it All Together

In this section, all the preceding ideas are put together to demonstrate how to make more money. Here, a comparison is made between an investment earns 4% per year compared to one that earns 5% per year. Also, twice as much money is invested in the latter one. Assume that both investments increase the income to the owner by 6% after the first year. To keep the example simple assume that the price paid for each investment is constant throughout both years (this is almost never true).

Case #1: Investing $600/year, 4% yield

Year #1

Add $600… Earns $24/year.

Year #2

Year #1 $600 investment. Earns $25/year.
Year #1 Earnings Earns $1/year
Add $600… Earns $25/year.
Total Year #2 $51/year

Case #2: Investing $1200/year, 5% yield

Year #1

Add $1200… Earns $60/year.

Year #2

Year #1 $1200 investment. Earns $64/year.
Year #1 Earnings Earns $3/year
Add $1200… Earns $64/year.
Total Year #2 $131/year

In summary,Case #2 earned more than twice as much Case #1 ($131/year versus $51/year) after the second year because the investment earns more and this additional earnings compounded during the second year.

  1. February 16th, 2012 at 16:44 | #1

    Wonderfully explained SFI! Albert Einstein called compounding the 8th wonder of the world and he knew what he was talking about!

  2. February 20th, 2012 at 14:15 | #2

    Love your explanation- thanks! Makes this often nebulous topic more clear 🙂