Looking Ahead: How and Why Investors Project Investment Income

Knowing what the future holds can be a powerful planning tool, especially for investors. Unfortunately, there's no crystal ball for predicting the markets, but investors can often reliably predict how much income they can expect their investments to generate.

When it comes to making money, investors have several options. The classic method involves buying a security and selling it later when its price (ideally) increases. However, certain stocks, exchange-traded funds (ETFs), mutual funds and other investments can also provide dividend¹ or interest payments – no selling involved.

A regular stream of monthly, quarterly or even annual payments can play an important role in a portfolio, unlocking cash flow that can be used for spending, reinvestment and more. Learning to predict how much income your holdings might generate can come in handy when you are:

• Reinvesting income with a dollar-cost averaging strategy
• Getting a sense of taxes you may owe on your investments, especially if you own a non-registered account
• Reviewing income-generating securities in your asset mix
• Budgeting your investment cash flow in retirement
• Generally curious about the future value of your portfolio (and who isn't?!)

Let's explore more about how and why investors project their investment income.

How to project investment income

Many DIY investors craft complex spreadsheets to automate calculations and keep track of their holdings – including projecting dividend and interest income. But there are also tools that can make this a whole lot easier.

At RBC Direct Investing, you have access to an interactive income projection tool, which offers a simulated sneak peek at what your dividend and interest income could look like in the future. You can select specific accounts to review, which generates a month-by-month bar graph of potential returns over the next year. Hovering over each month provides a breakdown of the projected income by investment type.

The tool, found in the Portfolio Insights section under the Monitor menu, offers three high-level calculations that can be helpful when trying to understand your income: projected total annual income, projected average monthly income and the number of investments that pay income. Plus, you can see a breakdown of your holdings by asset type. This expanded view provides a deeper look at individual holdings, along with key information, the option to make a trade, and more ways to dive even deeper into your holdings and empower your research.

Drive your research

To get the most out of the income projection tool, be sure to track your projections and consider them regularly when making investing decisions. You can save your projections for future reference by printing them or exporting them to a spreadsheet.

What a DIY method looks like

To give you a sense of what the income projection tool will calculate for you, let's take a look at potential income from stocks. An investment's yield is the percentage of its value that it returns to its holder annually in the form of payments. A dividend-paying stock will have a dividend yield, which can be found on its detailed quote and income projection pages.

Multiplying the yield expressed as a number by an investment's current share price, ahem, yields its annual dividend payments in dollars: Annual dividend = dividend yield / 100 x stock price

You can divide the annual dividend by the number of payments (e.g. quarterly) to predict individual distributions. It's important to remember that dividends and certain other payments are not always guaranteed. Their returns can vary in response to market fluctuations, and in some instances companies may choose not to pay them.

That said, stocks are only one type of income-paying security. For portfolios containing stocks, ETFs, mutual funds, and/or fixed-income securities, it can require several rounds of calculations and a handful of formulas to accurately estimate your portfolio's cash flow.

Income projection tool FAQs

You may have some questions as you explore the income projection tool. That's totally fair — it can do a lot for you! Here are some key points to keep in mind when you dive in.

• How does the income projection tool work? The tool gives you an estimate of income projected forward for up to 12 months based on your current holdings of regular-paying dividends and interest from stocks, exchange-traded funds (ETFs) and mutual funds.
• Can I use the income projection tool for my taxes? The income projection tool is useful only as an estimate of what you might expect to receive going forward. It does not include income already received. Relevant tax slips should be relied upon at tax time.
• Why am I not seeing the projected income I was expecting? The income projection tool is based on your current holdings of regular paying income-producing securities (dividends and interest) but it is not inclusive of all income sources. For instance, the tool does not estimate income from individual fixed-income securities and there may be other exclusions.

Ready to try out the income projection tool? Find the income projection tool here or under Monitor > Portfolio Insights on the site menu.

The information provided in this article is for general purposes only and does not constitute personal financial advice. Please consult with your own professional advisor to discuss your specific financial and tax needs.