Establishing an Income Portfolio

If you ever wondered how people make a living off of the stock market without doing anything, look no further than dividend income. A solid base of dividend paying stocks, both monthly and quarterly, can help keep you afloat in turbulent times when the market is roller coasting.

A good strategy to start out with would be around 5 to 10 stocks that pay between 4% and 10% dividends that are highly rated and considered safer investments. These include stocks like AT&T, which pays almost 6% yield, Duke Energy at around 5%, and Fifth Street Finance Corp. at about 10%. This will form a secure base that consistently provides an influx of cash and good upside potential. In addition, if you're an intermediate to advanced investor, you can sell options on many of these stocks, providing yet more income and lower risk. Stocks such as Fifth Street Finance pay monthly dividends, so if you need to use dividends to pay monthly bills, load up on more stocks like it.

Sometimes people go overboard with diversification. If you're holding a portfolio of 20 dividend paying stocks, but you only have 100 shares of each, it may be in your best interest to increase your holdings in the larger companies such as AT&T rather than buying new stocks with similar dividend yields. This is because of the effects of compounding: your investment will increase in value quicker through capital gains when holding a larger number of shares. Too many dividend investors these days forget about the other important aspects of portfolio income, such as capital gains and compounding, and is a reason why their portfolio doesn't gain value as quick as they would like, despite high dividend yields.

In addition to dividend paying stocks, an investor may want to include stocks solely for capital gains income in their portfolio. This could include small and mid-cap stocks which have greater gains potential. A couple examples include PDL Biopharma Inc. and Power-One Inc. The inexpensive price doesn't necessarily mean that the stock is bad, and a couple hundred shares increasing at a few pennies can provide substantial income over dividend paying stocks. Ultimately, the goal for an income portfolio is a balance between dividends and capital gains, but leaning towards dividend income.

Source:
Yahoo! Finance
http://finance.yahoo.com/