How to Build a Private Income Portfolio

In today’s low-interest-rate environment, many investors are looking for alternative income-generating assets to complement or replace traditional fixed-income investments. The aim is to build a private income portfolio.

Those who have private incomes already know that how to build a private income portfolio – here’s how.

Among the options available, closed-end funds (CEFs), covered call ETFs, private credit funds, and high dividend ETFs are increasingly popular.

In this article, we’ll explore how to construct a diversified private income portfolio of these assets that can generate monthly income.

The Importance of Diversification

Before we jump feet-first into the specific types of assets that can generate monthly income, it’s important to understand the value of diversification. Diversification is the practice of investing in a variety of assets across different sectors, geographies, and asset classes. Diversification needs to considered from a tax perspective too.

The goal of diversification is to reduce the risk of losses in any one asset or sector and to increase the potential for returns over the long run.

A diversified portfolio can also help investors generate steady income, even if some assets in the portfolio experience temporary declines. For example, if an investor holds both CEFs and covered call ETFs, the dividends from the CEFs can help offset any losses from the ETFs during market downturns.

Building a Monthly Income Portfolio

To build a monthly income portfolio, investors should consider including a mix of CEFs, covered call ETFs, private credit funds, and high dividend ETFs.

Each of these asset classes can provide a different type of income stream, which can help diversify the portfolio and generate steady monthly income.

CEFs

Closed End Funds are investment vehicles that trade like stocks and invest in a variety of assets, such as stocks, bonds, and other securities. CEFs can be attractive to income-seeking investors because they typically pay out regular dividends, which can provide a reliable stream of income.

CEFs can also provide exposure to a variety of asset classes, which can help diversify a portfolio. For example, a CEF that invests in municipal bonds can provide tax-free income, while a CEF that invests in high-yield bonds can provide higher income but with more risk.

One way to invest in CEFs is through a fund of funds, which is a type of mutual fund that invests in a variety of CEFs. Fund of funds can provide additional diversification by spreading investments across multiple CEFs.

Covered Call ETFs

Covered call ETFs are a type of ETF that generate income by selling call options on the stocks in their portfolio. When an investor buys a covered call ETF, they are effectively buying a portfolio of stocks that have sold call options on them. The income generated from selling these call options can provide a steady stream of income for investors.

One benefit of covered call ETFs is that they can provide downside protection during market downturns. Because the ETFs have sold call options on their portfolio of stocks, they are effectively limiting their potential losses in the event of a market decline.

Private Credit Funds

Private credit funds are investment vehicles that provide loans to privately held companies that may not have access to traditional bank financing. Private credit funds can be attractive to income-seeking investors because they typically offer higher yields than traditional fixed-income investments.

Private credit funds can also provide additional diversification to a portfolio, as they are not directly correlated with the stock market. This can help reduce the risk of losses during market downturns.

One challenge with private credit funds is that they can be less liquid than other investments. Investors should be prepared to hold their investment for the duration of the fund’s life cycle, which can be several years.

High Dividend ETFs

High dividend ETFs invest in stocks that pay high dividends, such as utilities, real estate investment trusts (REITs), and consumer staples. These ETFs can be attractive to income-seeking investors because they typically offer higher yields than the broader market.

High dividend ETFs can also provide exposure to specific sectors that may be attractive for income investors. For example, a high dividend ETF that invests in utilities may provide stable income, while a high dividend ETF that invests in REITs may provide exposure to the real estate market.

However, it’s important to note that high dividend ETFs can be more volatile than other types of investments, as they are heavily influenced by changes in interest rates and the performance of the underlying stocks.

Constructing a Diversified Portfolio

To construct a diversified portfolio that generates monthly income, investors should consider including a mix of CEFs, covered call ETFs, private credit funds, and high dividend ETFs.

One approach to constructing a portfolio is to allocate a portion of the portfolio to each of these asset classes. For example, an investor could allocate 25% of their portfolio to CEFs, 25% to covered call ETFs, 25% to private credit funds, and 25% to high dividend ETFs.

Within each asset class, investors should also consider diversifying their holdings. For example, within the CEF allocation, an investor could include funds that invest in municipal bonds, high-yield bonds, and stocks. Similarly, within the covered call ETF allocation, an investor could include ETFs that invest in different sectors, such as technology, healthcare, and consumer staples.

Investors should also consider the risk profile of each investment and balance their portfolio accordingly. For example, while private credit funds may offer higher yields, they may also be more risky than other types of investments. As such, an investor may want to allocate a smaller portion of their portfolio to private credit funds.

Finally, investors should monitor their portfolio regularly and rebalance as needed to ensure that their allocation remains diversified and aligned with their investment goals.

More on Private Incomes

As a holder of a private income portfolio myself, I know the sheer satisfaction that can be experienced by building, and then eventually living off a private income.

Building a private income portfolio is the quietest, most understated piece of wisdom I know how to offer anyone.

A private income can be built either quickly via owning a business and funneling funds quickly into the portfolio, or over a long period of time of you are a salary earner. Either way is just fine. Don’t listen to the voices of dissent, just go ahead and quietly build a private income portfolio – start today.

Cheers

Hugh Walker