Many investors get hung up on returns, but there’s more than one way to earn money through your investments. Exchange traded funds (ETFs) can deliver some income. Do you know the five ways that your investments can potentially pay you?
There are a variety of investments that provide returns such as through interest, dividends, potential for capital appreciation and tax advantages, remarks Mark P. Cussen for Investopedia. Cussen elaborates on the more common types of incomes paid out by investments, which includes:
- Interest. Everyone should be familiar with interest, as it is paid on any debt instrument. Each debt instrument pays a stated rate of interest and are usually tied to current interest rates. Rates paid don’t beat inflation over time, unless they are of the high-risk variety. Credit ratings issued by reputable rating agencies provide a strong indicator of the capability of an issuer to pay back their obligations on securities.
- Dividends. Dividends are a portion of a company’s earnings passed on to equity investors, but they are only paid on stocks or mutual funds that invest in stocks. Not all companies pay out dividends. Dividends are paid on common and preferred stocks, preferred stocks usually have higher rates. Furthermore, dividends can be ordinary, which are taxed like ordinary income, or qualified, which are taxed on long-term capital gains.
- Capital gains. This represents the appreciation in the price of a security or investment from time purchased and is categorized as either long- or short-term. Equity- and fixed-income securities can post gains or losses. Fixed-income securities can appreciate in the secondary market but are intended to pay current interest or dividends. Stocks and real estate provide most of the returns to investors as capital gains.
- Tax advantages. There are some types of investments with tax-advantaged income. Working interest on oil and gas leases can provide revenue with 15% tax-free based on depletion allowances. Limited partnerships may pass through passive income, income generated from a partnership that investor is not actively involved with. Passive income can also be written off with passive losses, expenses associated with operating an income-generating activity.
- Total return. Total return includes capital gains, or subtracting capital losses, dividend or interest income and any tax savings. There may be more than one type of return associated with an investment. Common stocks provide dividend and capital gains. Fixed-income securities provide capital gains along with interest or dividend income. Partnerships could potential provide all of the above on a tax-advantage basis.
When investing into stocks or ETFs, it is important to have your own strategy in place for the time frame you have in mind. We are a strong proponent of trend following.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.