How Do Investors Pay Themselves?

Investors "pay themselves" by generating various forms of returns from their investments, ranging from regular income streams to profits derived from selling assets. The method of payment depends primarily on the type of investment and the investor's role.

Diverse Ways Investors Generate Returns

Investors receive payments based on the specific asset they hold and their level of involvement. These returns can manifest as ongoing income, a share of profits, or gains from the appreciation of asset value.

For Business Owners and Founders

Owners of businesses, including startup founders, often derive income directly from the company they own or operate. Their compensation structure can be multifaceted:

• Salary: If actively involved in the company's operations, owners may draw a regular salary as an employee for their work and contributions.
• Dividends: A portion of the company's profits distributed to shareholders. For business owners, especially those with significant equity, this is a direct cash payout to them as owners. Learn more about dividends.
• Distributions: Similar to dividends, these are payouts of cash from the company's profits to its owners. This method is common in pass-through entities like LLCs or S-corporations, where profits are passed directly to the owners to be taxed at the individual level.
• Owner's Draw: For sole proprietorships or partnerships, owners can take an "owner's draw" from the business's profits for personal use.

For Stock Market Investors

Investors in publicly traded companies primarily earn through two mechanisms:

• Dividends: Regular payments made by companies to their shareholders, typically from their earnings. Not all companies pay dividends, but for those that do, it provides a consistent income stream.
• Capital Gains: Profit earned when an investor sells an asset (like stocks) for a higher price than they paid for it. This is a one-time payment realized upon the sale of the investment. Understand capital gains better.

For Bond Investors

Bonds are debt instruments that typically provide predictable income streams:

• Interest Payments: Bondholders receive regular interest payments (also known as coupon payments) from the issuer until the bond matures, at which point the principal amount is returned. Explore how bond interest works.

For Real Estate Investors

Real estate investments offer both income and appreciation potential:

• Rental Income: Money collected from tenants for the use of the property. This is a common and often consistent form of payment for landlords.
• Capital Appreciation: Profit realized when selling a property for more than its purchase price, due to an increase in its market value over time. Learn about capital appreciation in real estate.

For Mutual Fund and ETF Investors

These pooled investment vehicles distribute earnings from their underlying holdings to investors:

• Dividends and Capital Gains Distributions: Funds pass through dividends and capital gains earned from the stocks, bonds, or other assets they hold to their investors, usually on a regular basis (e.g., quarterly or annually).

Summary of Investor Payments

To summarize the various ways investors pay themselves, refer to the table below:

Ultimately, how an investor "pays themselves" is dictated by the specific type of investment they hold and the returns it generates.