Are you ready to make the leap into earning passive income? Do you want to live the life of your dreams without restraint?
There are many ways to earn passive income; however, dividends require the least amount of physical work.
On the flip side, dividends require the most cash to generate significant returns for you to pay bills and go on adventures.
The Magic of Passive Index Fund Investing
Income investing versus everything else. You can lower the cash you need to invest by purchasing higher-yielding products.
These higher-yielding securities require a high financial intelligence of market strategies and interest rates.
You can become a great income investor if you take the time to understand markets (bonds, commodities, treasuries, stocks) and rates (Federal Reserve, bonds).
Income investing is not for the faint of heart. There will be moments when you see red inside your portfolio (negative returns).
However, if you learn enough about the markets, you may view these as times to purchase more income at a lower price.
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How to start your journey. You cannot start a journey without a destination—investing has the same premise.
Making money just to make money doesn’t really motivate you during tough times; instead, focus on your dream retirement.
Who is with you, and what are you all doing? Once you have a beautiful picture in your head, it’s time to monetize.
Put a number on how much money income you will need to maneuver through retirement as you dreamed. You could ask for $5,000/month or $50,000/month; it’s your dream.
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Remember, the more cash flow you require, the more investment money you need to insert into your portfolio. There is no free lunch.
Making the numbers work. Once you have your monthly number, it’s time to reverse-engineer your income portfolio. Let’s work with $10,000 per month.
The annual income you require is $120,000. You can divide that by the dividend yield (9%) to reach the number you’ll need to invest ($1.34 million).
Over a million dollars seems like a large number, but we have the power of compounding on our side. You can use your dividend income to speed along the process of compounding.
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Now, we need to decide the best way to achieve a 9% rate of return from our income portfolio. This is where we use the six types of income investing to start making moves.
Emergency funds go first. Before we go further down the income investing rabbit hole, let’s review some information on emergency funds.
Your income investing portfolio cannot operate alone in a vacuum; it is part of your larger investment strategy. If things go awry, you’ll need tools you can use to escape the trouble.
Your emergency fund protects you and your family from calamities, job loss, pandemics, and medical emergencies.
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It also prevents you from having to sell your income-investing assets under duress during a large market downturn or correction.
Ensure you have a fully funded emergency fund before investing tons of money into your income-investing portfolio. At the end of the day, the stock market is unpredictable and unyielding to anyone.
The six types of income investing. I wrote an article titled “The Six Types of Income Investing” that will greatly help you.
Your Retirement Planning Guide 2
Each income type has its own pros and cons, so you’ll need the right asset allocation strategy to reach your retirement dreams.
1) I gravitate toward closed-end funds because of their monthly payment schedules and easy investment strategy.
2) Mortgage REITs have high yields but operate like bonds. You must know what season to purchase these securities during, or you’ll be underwater much of the time.
3) You can find large discounts on preferred shares and baby bonds, but the securities may last only 5-8 years.
4) You can invest in Dividend ETFs just like index funds; however, they have low yields compared to other income products.
5) High-yielding blue-chip dividend stocks like Altria (MO) and British Tobacco (BTI) produce high income with little growth.
6) Business Development Companies like Ares Capital (ARCC) also produce great income with little growth.
Putting all your eggs into one basket. I use every type of income investing product to fund my retirement: the more dividends, the merrier.
The Passive Income Hero 2
It’s important to avoid chasing yield indiscriminately. If something has recently doubled its yield, the market cut the price in half.
You need to research every product you buy and, over time, learn how it operates in a changing interest rate environment.
For most, except for blue-chip stocks, interest rates are the key driver for price action. Income products are more sensitive to rates because they are lenders and borrowers.
The key is understanding interest rate cycles and how your producer will react to news about unemployment, oil, rates, and housing.
My Four Favorite Index Funds
Conclusion. Buying income products is simple; however, understanding the underlying business can take some time.
The more you follow the news, the more your product will make sense. Yes, you can earn a 13-15% return on your investments if you buy at the correct time.
I messed up during my first round of buying income products. The products cost too much, and I began to average into positions.
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Then, the pandemic struck, and my entire portfolio turned red. I learned a lot about valuations (pricing) and interest rates.
The Federal Reserve slashed the interest rates to zero percent in 2020, which caused all sorts of mischief with my products.
I understand what happened then, and it’s why I invest differently today. If you want to have great results on the stock market, you must develop a keen understanding of market flow. 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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