How to turn your portfolio into an income machine
I’ve always loved the saying: you need to make your money work for you.
I interpret that as generating passive income and some streams of cash flow that go on behind the scenes as you enjoy life.
Now, when you are young and are early in your investment journey, the impact of dividends and passive income may not be that great.
For example, is you have $1,000 in an investment account, and generate a 5% yield, you will only receive $50 of income. However, if you have $1,000,000 in an investment account, and generate the same 5% yield, you would receive $50,000 of annual income.
That’s why, as Nick Maggiulli pointed out in his new book, ‘Just Keep Buying’, if you don’t have much money, focus on saving. As you accumulate wealth, that is when you should really focus on the details of your investment plan and how you can generate a steady income.
Investors have been able to make a lot of money in stocks based solely on price appreciation over the past decade. However, this environment is reminding investors that price appreciation is no guarantee and can be painful when it goes in the other direction.
That is why its crucial to construct a portfolio that can withstand several environments. One technique when it comes to investing is picking companies that reward investors with income (i.e. dividends).
Here are some suggestions on how to generate income inside your portfolio:
Dividend Stocks: A company has a few ways of rewarding their shareholders: make good business decisions that generate earnings which allows the share price to appreciate and distributing dividends.
A ‘dividend stock’ is a company that regularly returns a portion of their earnings to shareholders.
While some investors may consider them ‘boring’, they can provide some stability and diversification to your portfolio.
For example, the SPDR S&P 500 index ($SPY) is down 21.6% (through 6/22) while the SPDR Dividend ETF ($SDY) is only down 9.6% (I know, you are still down…)
Buying stocks that pay a dividend is a great way to earn additional income and enjoy the power of compound investing.
One thing to be cognizant of is the company’s payout ratio. A payout ratio is the % of a company’s earnings that goes towards its dividend. The higher the %, the more likely the company will ultimately reduce their dividend.
Bonds: “We buy stocks so we can eat well, we buy bonds so we can sleep well.” Investing in individual bonds, or a bond fund, is another way to generate consistent interest. When you purchase a bond, you are lending money to companies who in turn pay you interest. While they have historically been viewed as safe and a hedge against stocks, this environment has been tough for fixed income.
Even with the declines in price for bonds, they are paying out a great yield and can provide some much needed income for investors.
Also, we have already explored Series I Savings Bonds, which is paying 9% interest currently.
Real Estate Investment Trust (REIT): If you want to invest in real estate, but don’t want to deal with all the headaches that come with being a landlord, consider investing in a REIT. A REIT is a company that owns and manages real estate properties and pays out the income from those properties to its owners (i.e. you).
While their are many different kinds of REITs, and some can be complex and illiquid, there are publicly listed companies that you can invest in. The average yield for REITs right now is around 4%.
High-yield savings account: A high-yield savings account keeps your emergency funds readily accessible while usually generating more interest for you compared to a generic savings account. Some companies are now even offering 1% annual interest (woohoo!!).
Buying stocks or REITs that pay a dividend, investing in bonds, or putting money in a high-yield savings account may not be as sexy as owning large growth technology companies.
But these investments are a great way to make your money work for you.
I will stress the importance of not chasing yield as well. If it sounds to good to be true, it often is…
Disclosure: This material is for general information only and is not intended to provide specific advice or recommendations for any individual.