Six Figure Investor

When I started investing for income, my primary goal was to find good companies to invest in. An investment that pays you income is easier to value and much more likely to be an investment that is shareholder friendly. Also, a track record of paying dividends implies that the company manages its finances well.

After investing for a period of time, I have realized that your investment income can be a very powerful tool to increase your spending or supercharge your reinvestment into other companies that are attractively valued. By continuously putting money to work in the market can enable you to get outsized returns by taking advantage of opportunities that develop. Or, you can also just spend the money without selling any shares!

The more investment income you create, the better off your portfolio will be. Here are some tips to increase your investment income.

Read more…

Unfortunately, the tool I discuss in this article, from the Sharebuilder site,  isn’t available anymore. I’ll be on the lookout for a potential replacement.

You would think that calculating investment returns would be easy. It can be as complicated as you want to make it because annual returns are calculated based upon not only by what you make, but also over what time frame you made the money. If you are a dividend or income investor like me, you will have perhaps dozens or more transactions over any given year. So, each one will have its own return and the difference in return for each purchase can be quite large during the year even for the same investment.

I like to keep things simple. The easiest way to calculate return is to use the following formula:

Investment Return (%) = Investment Value / (Initial Investment + Added Money)

This way of calculating return is a very simple cash-in/cash-out percentage that doesn’t consider over what time frame that each transaction occurred. I like this because in the end percentages are OK, but you want to know at a high level how much money you made overall.

For example, lets say you invested $10,000 and added $500 during the year in new money + $500 in dividends or other income from the investments. At the end of the year, you had $15,000. Your investment return is $15,000/($10,000 + $500), or 42%. Anyone way of looking at this is that you made $4,500.

How About A Longer View?

If you listen to journalists and financial pundits, you may get a misguided idea about what your returns are over a longer period of time. For example, you will here repeated often that the S&P500 investor didn’t make any money over the last 10 years because the index value didn’t change.

This assumes that you invested your ‘chunk’ ten years ago, didn’t add to it, and didn’t reinvest dividends. This is unlikely to be true for most people. If you are to be a successful investor, you need to have a good idea about what your returns are over a longer period of time, because you may be making (or not making) what you think you are.

You can’t go wrong with the simple formula above, it measures the cash you put in and the total cash you have now.

This tool available at sharebuilder.com, ‘What If I’d Invested’ demonstrates that for even an investment that hasn’t appreciated overall, you can still chart impressive gains due to reinvestment and adding money. This is the way to succeed investing, probably more important than raw returns.

As an example, take Coca-Cola (KO) stock, which as of this writing is about the same price it was 10 years ago. However, when I input a $1,000 initial investment that reinvests dividends, I get an overall total return of about 45% over 10 years. Not too bad for an investment that ‘didn’t go anywhere’. See the chart below that is generated from the tool:

What’s the secret to financial prosperity? It’s pretty easy to describe but hard in practice. Most people sow the seeds for it without realizing it. For example, if you get a good education you learn skills that help you to think, analyze, and communicate effectively. It takes perhaps decades to complete and even then you are not done. Or, maybe you develop a long term hobby or interest that turns into a business. The first point is that prosperity doesn’t happen over night, it takes time to develop.

When you look at how prosperous people succeed, you will find that they develop skills around their passions, acquire and develop assets, and stick with it all over the long term.

That last statement is important. Success requires a long term commitment, you need to stick to it through times that can be giddy, depressing and everything in between. As investors our resolve was tested during the Great Recession of 2008. How did you fair? It is times like those that will determine if you have the right strategy to build your wealth over the long term.

Seeds Of Success

On this site, we mainly talk about improving your financial education. Once you understand investing basics and how investments make money, you can then study the many different types of investments that are out there. That’s where this site comes in, because we are going to do all of this work for you to find investments that will make you money. The first result of this effort is the Income Portfolio which you can track right along with me. This is a real portfolio that has is being tracked with trades as they occur.

How To Get Started

Getting started is the hardest part, perhaps harder than sticking with it. If you use this strategy, you will find that you can measure your progress and gain confidence quickly. The components are the following:

• Target an initial goal of money you want to make. My own personal target is a monthly income target.
• Find investments that offer good income and are attractively valued.
• Save money, and buy high quality investments that pay dividends, income or interest. All of the investments in the Income Portfolio pay money.
• Over time, add more money to these investments either monthly, quarterly, etc.
• Track you progress by measuring your income you make.

Create A Monthly Target

We track the income of the Income Portfolio monthly. You will find that the income of the portfolio increases every month due to money additions, reinvestment and dividend increases. Pick an initial monthly target. For example, if you are able to find investments that pay 4% per year or 7% per year, the following table shows what you would need to invest to get to that target.

Example: Income Portfolio

The income portfolio currently makes $47.46/month. When it first started out in October 2010, it earned $46.52/month. Not bad after about 3 months. Look for future updates that will show further improvement in this portfolio.

I had a moment with one of my brokers…

They sent me a slick, glossy brochure that talked about how to achieve your goals, different type of investment products and how the macro environment and business cycles impact your investments. I couldn’t help but think about that slick politician who after speaking for 30 minutes in the end has said nothing. The only thing I got out of the brochure was confusion.

Professional investors and brokers try to help, but in the end they want you to pay them to invest for you. Investing is too difficult for the average person after all. Bunk.

There are many different paths one can take to make money investing. For most people, they invest either using an investment manager who actively picks components just for you or more typically advises you about what kinds of mutual funds to buy. Mutual funds themselves are either actively managed by teams, or they track market or sector indexes. The components of the indexes are determined by established third parties, such as Standard and Poor’s which, e.g., is well known for the S&P500 large capitalization index.

In a more general view though, investments are much more than stocks, bonds and mutual funds. However, no matter what the investment is, there are pretty much only a few ways you make money.

How do you make money with mutual or index funds?

Ways To Make Money

I’ve already mentioned two of the ways above, capital gains and income. There is also a third one that I call valuable assets.

1. Capital Gains. Sell your investment for more money that what you paid.
2. Income. The investment periodically pays you income out of the money that the investment earns.
3. Valuable Assets. Things that have value but don’t create any earnings, you make money by selling higher (capital gain). This includes precious metals (gold, silver, platinum), art, sculpture, precious stones and other hard goods.

In the article Investing Basics, I talked about how you should evaluate investments by their earnings potential (even if the earnings never appear). If you look at #3 above, you might point out that valuable assets don’t make money. This is true, so it qualifies as a special case because you can still make money by capital gains on valuable assets.

How You Should Make Money

Don’t leave your investing life to chance. Don’t turn your money over to a professional without first understanding what your investments are, and how they make money. Don’t blindly buy an index fund and simply hope that you make money in the future.

I’m not suggesting that you go alone and start stock picking and day trading. I am simply saying that, whoever manages your money, you need to understand what it is that you own, how it makes money, and align this with your expectations. Investor success is not about beating the market, but matching your returns with your expectations.

Next Steps

On this site I have been writing about how to invest as well as other topics in personal finance. If you want to learn more check out these additional resources: More articles about investing.

Before I started investing for income, I had money in regular bank accounts and money market accounts. This is a good place to start particularly if you want to accumulate money that you want to eventually put into other investments. Also, even if you do invest, you will still want to keep some of your money in these very liquid accounts just in case you need it.

Accounts that you have at banks will typically pay interest every month. Typical public market investments pay dividends or interest quarterly. Some overseas stocks (e.g., European common stocks) pay even less frequently, typically twice a year.

If you want to earn money monthly how can you do this with typical public investments? Here are a few ideas.

Buy an Income Fund

If you are willing to consider a managed income fund, it’s not hard to find ones that pay out monthly. I’m not a big fan of funds due to investment costs and the fact that you don’t really have much control on what’s inside of the fund, you have to be able to trust the management. I do make some exceptions, e.g., in the IncomePort, we own some shares of a municipal bond fund (NNJ). Municipal bonds as well as other bonds are more difficult to buy and own directly so a fund can work here. (Treasuries are an exception, they can be easily bought directly from the Federal Government). Municipal bonds are exempt from your state income (in my case, New Jersey) as well as federal income taxes. These are a good addition to your portfolio.

Buy A Stock That Pays Out Monthly

There are stocks that pay dividends monthly, but these are rare due to the extra burden. It requires more administration and cost because each payment must be planned within the companies business model as well as all the documentation that is required from the SEC for each payment (a filing needs to be submitted for each one). As you will see below, those companies that have chosen to pay out monthly do it because they can easily based upon their business model.

Here are two examples. Because these companies earn rent every month off of real estate, they can chose to pay monthly.:

1. Realty Income Corporation (O) – We own this in the IncomePort
2. Inland Real Estate Corp (IRC)

There are some other examples, including timber and energy trusts.

1. Enerplus Resources Fund (ERF) – We own this in the IncomePort

For a long list of stocks, trusts, and funds that pay out dividends monthly check out this seekingAlpha article. It’s out of date but still offers a good starting point.

Create An Income Stream With Multiple Stocks

By choosing multiple stocks with different monthly dividend payment dates within a quarter, it’s possible to create a monthly income stream. This is harder to do with common stocks, because you would want to pick stocks primarily by their individual merits, and not when they pay out. However, preferred stocks offer a good opportunity since they are often similar/interchangeable especially if you pick ones offered from the same company. Within the IncomePort we have already a good start in the creation of a monthly income stream using preferred stocks. I talked about preferred stocks previously in this article along with some reasoning why you would want to own these stocks. A recap:

The IncomePort contains a few investments that offer the potential to earn 8%/year over the long term. No more, no less. These investments are a type of stock called preferred stock. It’s a bit of a misnomer to call these investments ‘stock’. This is what they have in common with typical common company stock:

1. There is the word ‘stock’ in the name.
2. They can be bought/sold just like stocks on exchanges.

That’s it. These investments have more in common with bonds, which are loans made to the company. Preferred stocks work the same way:

1. Investors loan the company a bunch of money.
2. The company periodically (typically quarterly) makes a fixed interest payment.
3. The loans can go on for many years (30 years or more), sometimes never expiring because they can be renewable.
4. The investment can be ‘called’ (closed out) as determined by its underwriting rules.

Typical preferred stocks pay out interest quarterly. However, by buying a set of preferred stocks that pay dividends at different months, we can structure a portfolio that mimics a monthly dividend simply by buying at least (3) different ones -one for each month in a quarter. Doing a little bit extra leg work, I’ve come up with a list that goes one step further – getting payments every two weeks. Here’s the list, along with when each security would pay its dividend in the first quarter.

krb-d 1/1 - in the IncomePort

hcn-d 1/15  – in the IncomePort

cfc-b 2/1   – in the IncomePort

krb-e 2/15

jpm-i 2/28

mer-m 3/15

mer-e 3/30

All of these preferred stocks (including the ones not in the portfolio) are recommended. Each is an investment grade security as per Moody’s.