Returns from investments you own — how they work, how they are taxed, and what they can realistically provide
Portfolio income is what your investments pay you: dividends from shares and funds, interest from bonds and cash, and capital gains when you sell something for more than you paid. Unlike active income it does not depend on hours worked; it depends on how much you have invested, what it is invested in, and time.
Broad index funds hold hundreds or thousands of companies at low cost and are the core of most long-term portfolios. Bonds and bond funds pay interest and usually move less than shares. Cash in insured savings accounts, CDs and Treasury bills pays interest with the least risk and, over long periods, the lowest return. The SEC's Investor.gov explains how spreading money across these — asset allocation — balances growth against risk.
A common planning rule, from William Bengen's 1994 research and the later Trinity study, is that withdrawing about 4% of a diversified portfolio in the first year and adjusting for inflation has historically lasted around 30 years. On that rule, $100,000 supports roughly $4,000 a year, or about $333 a month. That is a historical guide, not a promise: markets can fall sharply — U.S. stocks lost about 37% in 2008 — and returns are never guaranteed.
Tax-advantaged accounts come first for most people: an employer 401(k), at least up to any match (the 2026 employee limit is $24,500), then an IRA (the 2026 limit is $7,500). In an ordinary brokerage account, qualified dividends and long-term capital gains (assets held more than a year) are taxed at 0%, 15% or 20% depending on income, while interest, non-qualified dividends and short-term gains are taxed as ordinary income.
High fees quietly take a large share of long-run returns, so check expense ratios. Picking individual stocks is harder than it looks: S&P Dow Jones Indices' SPIVA scorecards have repeatedly found that most actively managed U.S. large-cap funds trail the S&P 500 over ten years or more. Selling after a fall locks in the loss. And money you need within a few years does not belong in shares at all.
Related reading: Interest Income.
Interest, dividends and capital gains from investments you own. The IRS treats it separately from both wages and passive rental or business income.
Using the 4% planning rule, about $300,000 ($12,000 a year ÷ 0.04). That is a historical guide for long retirements, not a guaranteed yield.
Tax rules, limits and pay data change. Check the current figures with the primary source before acting on them.