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Published: December 20, 2009
They say the first time parents feel old is
when they realize their children are old. When I graduated
college, my mother still called me her baby. When I turned 40,
she said I still reminded her of a schoolgirl.
Then one night, my mother and I started discussing
income-investing ideas. As a retired librarian, my mom looks to
supplement her city pension with safe, dependable income from
her investments.
All of a sudden, the phone went quiet. She sighed. "If my own
daughter is investing in income stocks, then I must be old."
I am bringing up the tail end of the baby boomers. There's no
question we got older. The real question is whether my
generation has gotten any wiser.
It might be considered a small miracle if we see a Social
Security check in our lifetimes. A company pension plan? Are any
still left out there?
Millions of baby boomers invested their 401(k) plans in
aggressive growth stocks and patiently waited for the promise of
a comfortable and secure retirement. Income investing was for
widows, orphans and the faint of heart.
How is that working out for the boomers?
Well, things aren't quite going according to plan. Most 401(k)
plans had barely begun to recover from the tech bubble when the
financial crisis came along in 2007. By October 2008, retirement
plans had lost $2 trillion in the downturn. And even now, with a
market rally at our backs, the Dow Jones Industrial Average is
hovering around 10,000 -- right back where it was in 1999. Ten
years of gains... gone.
Boost Your Income from $1,400 to $5,299 in Just a Few Years
Ten years later, baby boomers are looking at investments
differently. In fact, for the first time in their lives, their
investment needs are in lock-step with those of their parents.
Even the younger generation is paying heed to the wisdom of
diversifying with income investments. They are starting to
realize that income investing, especially when coupled with a
dividend reinvestment strategy, is an effective way to not just
generate income from -- but also grow -- a portfolio.
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The chart above shows your potential annual
income stream assuming a $20,000 initial investment in stocks
with an average yield of 7%. Thanks to the power of reinvested
dividends and dividend growth, after 10 years your portfolio
could be generating $5,299 in annual income -- that's +278.5%
more income when compared to an investor who doesn't
reinvest. In fact, it could be generating an effective yield of
26.5% based on your initial $20,000 investment.
If you have even a little bit more time on
your investment horizon (or more money to invest, or additional
dollars to invest each year), then the numbers only get better.
And keep in mind that these are conservative estimates.
Doesn't leave much doubt in the power of dividends, does it?
The Easy Way to a High-Income Portfolio
That's why I wanted to come up with an easy way for investors to
build a portfolio of frequent dividend-paying investments. I
wanted it to be appropriate for investors who have current
income needs as well as those who have a few years to build up
their portfolio through reinvestment, providing a higher level
of income for the future.
What I found (along with our Chief Investment Strategist, Paul
Tracy) is that there are some common themes that should
facilitate the growth of a portfolio's income stream. We touched
on these items in
a past issue of
Dividend Opportunities, but they bear repeating:
Global Exposure: Many countries offer higher dividend
yields than the U.S. While the average yield of the S&P 500 is
hovering around 2.2%, New Zealand's All Ordinaries Index boasts
an average yield of 5.0%. Chile even requires companies pay out
30% of earnings to investors.
Foreign economies are also growing faster than the United
States. The International Monetary Fund projects the U.S.
economy will grow by +1.5% in 2010. Meanwhile, Australia is
estimating its growth rate at +2.8% in the next fiscal year.
Some experts are predicting China's economic growth could
surpass +9.0%.
Small Capitalization Opportunities: Companies with
smaller market capitalizations have proven over time that they
typically outperform their larger peers. As they grow earnings
faster, they have the opportunity to boost their dividends
faster. While income opportunities in small caps are more
limited, they are usually worth the time it takes to ferret them
out.
Tax-Advantaged Income: There's an age-old expression:
It's not what you make, it's what you keep. That is especially
true for income securities. Even with existing tax rates,
tax-equivalent yields on securities that offer tax-free income
(like municipal bonds) can push into the double-digits. And
since tax rates may be rising in the foreseeable future, tapping
into tax-advantaged income could become even more important for
income investors.
Monthly Payers: If you're looking for a steady,
dependable income stream, there's nothing like a security that
pays monthly. Although some individual stocks pay monthly, the
vast majority of monthly dividend payers are closed-end funds.
Many of these funds have a strong track record of delivering
above-average yields for a very reasonable fee.
I believe so strongly in these themes that I've made them the
guiding light of my brand-new newsletter,
The Daily Paycheck.
In this income newsletter, I'll be investing right alongside you
with $200,000 (yes, that's real money) to construct my "Paycheck
Portfolio." My goal is to end up with a portfolio that generates
a steady stream -- daily if possible -- of above-average income.
I will also be reinvesting the portfolio's dividends.
My aim is to provide valuable income-producing ideas, whether
you have $2,000 or $2,000,000 to invest. It's designed to
benefit both investors who require income today -- like my mom
-- as well as those who have time to reinvest for the future --
like me.
I just published my first issue yesterday, so it's not too late
for you to join me today and benefit from my first seven
picks I added to my portfolio. All you need to do is
visit this link.
Amy Calistri
Editor
StreetAuthority's
Stock of the Month
The Daily Paycheck |
