Do you want to be a high-yield dividend income investor but fear losing principle? Almost anything you invest in with high-yield faces interest rate risk.
It’s understandable if you gravitate to safer products like Series “I” Bonds or Treasury Bonds. If you are near retirement, you must protect capital at all costs.
But what if I told you that you could become an income investor without risking the loss of capital? Does this sound too good to be true right?
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What is bond reinvestment? “The Bond Book,” tells us that bond investors calculate bond reinvestment as one of their buying criteria.
Investors attempt to reinvest interest from bonds at the same interest rate as a bond. For example, if I have a bond paying me 4%, I would take that interest and attempt to earn 4%.
Bond reinvestment is tricky because interest rates are inconsistent. It may be challenging to find a 4% yield over 30 years.
Enter income investing. If you read my article, you know I am a massive fan of income investing. With income investing, you aim to receive a high dividend payment today.
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I also use dividend growth and passive income investing in rounding out my stock portfolio. But I heavily favor income investing because I want my money NOW.
However, income investing is risky to some because it takes knowledge and discipline. You invest in products that adjust with changes in interest rates.
High-yield junk bonds, leveraged businesses, commodities, and mortgage REITs are some of these products.
A safe way to invest income. If you have the time, say 10-20 years, you can create a massive bond portfolio with a side of income investing.
The idea is to take your bond interest payments (coupons) and reinvest them directly into an income portfolio. This keeps your initial capital, which is inside the bond, away from the markets.
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Your only risk is on interest payments. If you have the stomach, this could be a great way to get into a more leveraged side of investing.
Let’s do an example. Let’s say you have $100,000 in a 30-Year Treasury Bond that yields 5%. Your annual interest would be $5,000.
Let’s take that $5,000 and invest it directly into an M1 Finance income portfolio that yields 10%. I will put the money into AGNC, a monthly paying Mortgage REIT.
The first year, I would receive two payments of $2,500 from the bond. I would get those two payments the following year, plus $42/month from AGNC.
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If you reinvested the AGNC dividends into the portfolio, it would compound into $79,000 over the next 29 years.
Imagine if you kept reinvesting some of the dividends while using some for everyday expenses.
The principle is still intact. The bond will mature at the end of 30 years, and the US Government will hand you back $100,000.
Of course, due to inflation, the $100,000 probably has the spending power of $20,000, but that’s okay.
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Over 30 years, you earned $150,000 in coupon payments. Let’s look at investing in an income portfolio without the magic of compounding.
That’s about $1,250/month in dividends without compounding or dividend reinvestment. I took $150,000 multiplied by a 10% dividend yield, then divided by 12 months.
Why travel through a bond? So why is it essential to invest in bonds first? You could just invest your initial $100,000 directly into a high-yield portfolio.
We bought the bond because it gives us the safety of principle. Sometimes security is more important than a more significant return on investment.
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Safety is its own form of return on investment, and we must consider our emotional attachment to financial security.
Having all of your money in the stock market is fun until it is not. Buying a bond and reinvesting the interest in high-yield products will give you the freedom to purchase higher-yielding (read risker) products.
You may want to diversify into cryptocurrencies with your interest payments. Of course, I am a buyer of USDC, even if things are currently unstable in crypto markets.
High-yield investing is fun, but the products can move in crazy directions. They are not like dividend growth stocks that generally move up in price over time.
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The safety in bonds. Remember, you can lose money with bonds if you sell before maturity because 30-Year bonds trade on the bond market.
When you sell your 30-Year bond through the Treasury Direct website, you are at the whims of the market. I don’t plan to sell my bonds, so I don’t consider that a factor.
You can also make money from bonds. Your 5% bond is worth more if today’s bonds go for 2%. I wouldn’t get into bond trading without reading 10-20 books on the topic.
I read one book, “The Bond Book,” and I see that bond investing is much more complex than investing in the stock market. I buy and hold my bonds to reap the full safety benefits.
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Conclusion. I hope I opened your eyes to a different approach to income investing. Most people do not like to see their portfolios in the red.
You must prepare yourself for a depressing portfolio to become an income investor. Remember, you are investing for the paycheck, not the capital gains.
Therefore, running your money through a bond will keep your principal safe and away from capital markets, allowing you to test the waters.
I do not recommend income investing to most people. Most retail investors (the average person) should invest in passive index funds.
If you are intrigued by interest rates, mortgage rates, commodities, treasury yields, etc., give income investing a try. And you can do it with low risk by using bond interest. Good Luck!
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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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