Fall is a beautiful time of the year. The weather turns cool, the leaves turn orange, and we get to enjoy our income streams during Christmas shopping. We all have passive income streams, correct?
Building a stream of passive income, whether from royalties, dividends, rents, or business, is a great way to supplement your earned income. One day, if we take it seriously, we may be able to even retire off of these sources of revenue.
I think most people consider dividends as their favorite source of passive income—and who could blame them? Dividends are the most passive of all income streams, but they still take some knowledge to maintain.
How to FALL into Investing
Inside the world of dividends, there are many techniques and philosophies. You will need to decide which one(s) you choose to follow. Two of the primary schools of thought are Dividend Growth Investing (DGI) and Income Investing.
They both lead to the investor having a stream of income during retirement; however, the mindsets are almost entirely different. Understanding the path that best suits you is the first step on your journey, so let’s jump right into the battle.
First, let me say that you can mix and match anything and everything you want; I do. I love both of these methods, so I use them both, along with some index fund investing as well. Only you can create the perfect portfolio that meets your needs. However, it is good to know multiple techniques because your priorities can change on a whim.
Dividend Growth Investing is the art of investing in large dividend-paying blue-chip companies for the long run. Investors use dollar-cost-averaging, share price appreciation, dividend reinvestment, and dividend growth to build their wealth and income. When you turn off dividend reinvestment, your portfolio will produce a nice stream of income.
Income Investing is the art of investing in high-yield products for immediate income. You invest in products that give you a high income today and reinvest excess cash flow to make your portfolio grow more revenue. The best way to get capital appreciation is to buy these products at a discount.
We Make $650/Month in Passive Income
Compound Annual Growth Rate (CAGR) is a word that gets thrown around a lot, especially in the DGI community. CAGR is the total growth of a stock or company. Understanding the CAGR of a company is one of the main differences between DGI and Income investing.
For example, let’s take the hypothetical company XYZ. You invest $10,000 in 2010 and finish 2020 with $40,000 after reinvesting all dividends. Using our CAGR calculator, our CAGR is 14.87%.
When DGI investors choose stocks, they may look at the CAGR for the last 10 to 20 years and attempt to predict a CAGR path towards the future. They factor in the dividend yield, share price appreciation, and dividend growth into their investment thesis.
McDonald’s (MCD), one of my favorite blue-chip stocks, may only have a dividend yield of 2.5% but may have a CAGR of 15% (random number). Since, as a DGI’er, I am investing for the long term, this 15% may fit my investing needs.
10,000 Hours to Build an Income Stream
As an income investor, I am screening for a completely different investment thesis. I am looking at the yield and the stability of the company. As you may know, Pimco closed-end funds are my favorite income source. I trust PIMCO will give me high immediate income through PCI, PTY, and PDO funds.
Buying PIMCO products is always in favor, but I double down when their value takes a hit on the marketplace. The bigger the discount, the higher the yield. I usually have dividend reinvestment off for my income portfolio. I can use this income today, and when I have excess, I reinvest into products that are on discount.
An example of $20,000. As investors, we need to know where we are going to create the appropriate road map and investing thesis. I have written many articles on retirement (it’s what I do), but here are some I wrote that are age-based.
The Planning for Retirement series includes your 20s, 30s, 40s, 50s, 60s, and 70s. I also have the Retirement Planning for the Average Person 1 + 2. You also want to look at how your dividends fit into your overall happy cash flow retirement. Having a total concept of your income and life goals is the key to investing success. Orange you glad you have passive income?
If I gave a DGI’er and an income investor $20,000, they both would invest it differently. Let’s provide them with a time horizon of 30 years and see how they allocate these funds.
Living Overseas on Dividend Income
DGI investor. The DGI investor has a military pension, owns a small ATM business, and has three rental properties. He wants to ensure his $20,000 grows over the next 30 years and give him income during retirement. He can invest $500/month into his DGI portfolio over 30 years.
The DGI investor splits his investment into four companies; McDonald’s (MCD), Johnson & Johnson (JNJ), Costco (COST), and Ally Bank (ALLY). Over 30 years, his portfolio grew at 8%, and he finished with $880,000.
More importantly, when he turns off dividend reinvestment, he sees $44,000/year of income from the portfolio. He gets this income because of dividend growth over the years. This income fits into his overall portfolio nicely.
Income Investor. Our income investor has a high-paying job and aggressively invests in her 401K, Roth IRA, and brokerage account. She also has a blog on that side that she expects to generate income for her lifetime.
Don’t Gamble Your Retirement Away 4
Since she invests most of her money into her future, she wants immediate income from her $20,000. She decided to split her portfolio in five ways; Pimco Income Fund (PCI), AGNC mREIT (AGNC), Altria (MO), Ares Capital (ARCC), and Owl Rock (ORCC).
This portfolio produces an 8% dividend yield, which is about $133/month. She spends about $100/month as her monthly dining allowance, and she reinvests $33/month for 30 years. At the end of her years, she has $246,000, and her portfolio produces $24,600/year (or $2,050/month).
The difference is that she spent $36,000 on her entertainment over those 30 years. This gave her more freedom because she was investing all of her other income. As I said, everyone has different investing goals. She still ended up with a nice chunk of change and a high income portfolio.
Combining the two. I make it known that I merge both methods. I love them both; however, my brain lends more to income investing. DGI is more of a hands-off approach to investing. I have one of my DGI portfolios through STASH.
How to Start Dividend Investing 104: Choosing Your Stocks
I set my STASH to invest $120/week into my DGI stocks automatically. In one year, my dividend income went from $11/month to $41/month. Again, in the long term, these numbers will start to become ridiculous.
My first income portfolio is through Wells Fargo. I reinvest some dividends, but I also take some cash. I leave the money in my brokerage account and choose my investments based on the flavor of the week. In one year, my dividend income went from $43/month to $138/month.
Why do I use both? I use both methods because it gives me choices in life. My DGI portfolio is my long-term success story, so I do not need to dip into these dividends, probably ever. However, an excellent DGI portfolio would do my kids wonders in life.
My income portfolio is nice to have in today’s world. I don’t need the income, but sometimes it’s nice to go to restaurants guilt-free. I am currently working overseas and get to come home on leave every once and a while.
Why Gold & Silver
When I came home for two months recently, my wife and I went to Sushi five times just on dividend income. As I wrote in “A $1,000 Dividend Spending Spree,” the point of dividends is to have guilt-free income. And it feels great to have a large amount of dividend income. We hit $550/month in total dividends last month.
I love being able to take immediate income as required. If I want to buy a video game, I don’t want to feel guilty about it—I just want my PIMCO closed-end fund to pay for the game? Is that too much to ask?
Find your balance. The final choice is up to you. Where are you heading? How much money will you need in retirement? Where will you be living? These are all questions you need to ask yourself first.
Then you can ask yourself if you love investing in blue-chip stocks like Apple (APPL), Microsoft (MFST), Procter & Gamble (PG), and Target (TGT). You may like investing in REITs, CEFs, BDCs, and dividend ETFs. I love them all and invest in them all. That’s just me, though.
The main questions you need to ask yourself are when do I need this income, and how do I want it served? A DGI portfolio takes years to get moving, and reinvesting income is a massive part of the process. An income portfolio is almost like creating a paycheck.
Let Dividends be Your Lighthouse During Retirement
The best way to test the waters is with M1 Finance pies. I have a pie for DGI and another for income investing. I can put a lump sum into each, and M1 will allocate the money across the various securities in my pies.
Today’s world is great for investing. There are no fees for buying shares, and you can purchase fractional shares on a recurring, automatic basis. There are no excuses for getting out there and building your dream portfolio.
Conclusion. Hopefully, you learned something today. Before you start, it is vital to know where you are going. Please go ahead and download my free books on Dividend Growth Investing and Income Investing. They will give you more insight into which method is best for you. As a quick note, you can also sell covered calls (options) with your DGI portfolio to generate more income.
Don’t forget that you can mix and match your heart’s content. You can do whatever you want, as long as it meets YOUR goals. For more investing articles and more, follow me on Twitter and also on my Facebook Page. Enjoy and Happy Investing.
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing
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