Factor income is the income earned as a result of a certain area of production. Wages are considered to be the factor income of labor, interest is income derived from debt investments, dividends are considered to be income from equity investments, and rental payments are the factor income from property or real estate. This income comes as a result of ownership or production activity.
One of the most common forms of factor income is wages from labor. Wages can come from employed or self-employed labor. While labor does not necessarily refer to a physically strenuous activity, it does refer to produced work or services that benefit an employer or clients in some manner. It is a contribution to society that is remunerated.
Examples of labor might include the creation of an advertising campaign, the editing of a novel, taking inbound calls in a customer service center, or performing maintenance on vehicles. Most individuals would not spend the time that is necessary to complete these tasks without some sort of compensation. Although volunteer labor does exist, most individuals concentrate on one form of activity to produce enough income to cover their living expenses.
Rental payments from real estate are another prevalent form of factor income. Individuals who own property but do not occupy it must generate enough income to keep up with costs, such as mortgage and routine maintenance obligations. Usually real estate investors hope to generate a profit from rental payments that exceeds their minimum obligations. Some investors maintain a portfolio of residential rentals while others specialize in commercial property.
Regardless of the type of property, income is generated from the existence of the property's space. Through ownership, the real estate investor is "producing" a tangible good that can be sold. The property generates income by being used by lessees as a place of business or residence.
Capital investments such as bonds and stocks produce factor income as well. Interest payments are received by lenders in exchange for the borrower's convenience of having access to funds. Loans, credit, and savings bonds are examples of production factors that produce income for lenders. In this case, the production factor is money or liquidity.
Equity investments in stocks sometimes produce what is referred to as dividend payments. Companies choose whether to issue dividends to shareholders when they receive excess profits. Some pay back a portion of those profits in income payments that reward the shareholders for their monetary investment in the company. Similar to bonds and loans, the production factor in this case is also money.