I’ll keep this series very simple: allocate your age (the number) to income-investing products. If you are 25, allocate 25% of your investment portfolio to income. If you are 75, allocate 75%.
Income-investing assets are products that focus primarily on current income. Therefore, they exclude dividend growth stocks like Apple (APPL) and Johnson & Johnson (JNJ).
Working within this context, we can determine the rest of our allocations for each age group. For this article, we will start with the 20s. Let’s begin.
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What are our allocations? We will invest 20% of our portfolio in income-investing assets in our 20s. The other allocations are speculation (10%), growth (30%), and dividend growth (40%).
Be careful with speculation. Many people confuse speculation with growth. When we speculate, we don’t have all the facts.
In a perfect world, we could have chosen long-term success stories like Amazon (AMZN) and Tesla (TSLA) before everyone else got the memo.
In reality, it’s challenging to pick a winner before the company has even turned a profit. Therefore, in your 20s, you should limit your speculation budget to 10%.
Even having one or two stocks that go the distance will significantly enhance your future returns. Although we are speculating, we want to arm ourselves with as much information as possible.
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The most difficult part of this equation is letting your winners run. It’s tempting to sell when your stock is up 400%. However, think about retirement and attempt to predict if this stock will still be around.
Sometimes, stocks like Tesla (TSLA) and (AMZN) can achieve amazing feats that are out of the ordinary. You want to position yourself to be a long-term winner.
Where’s the growth? Speculation is not growth; it’s speculation. We find our growth in index funds and fully functioning corporations with great histories.
Index funds should make up 20% of our stock portfolio in our 20s. Index funds represent the best way to achieve low-risk growth that aligns with the market.
My four favorite index funds are: Nasdaq 100 (QQQ), Total Stock Market (VTI), S&P 500 (SPY), and Dow Jones Industrial Index (DIA).
You can put 5% of your portfolio in each of these. If you prefer technology stocks, place more in QQQ. If you like dividend companies, place more in DIA.
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The remaining 10% of our growth portfolio can be used to pick solid, growing companies. These companies may not pay a dividend, but they are profitable.
Sometimes, the main difference between speculation and growth stocks is whether the company is profitable. Consistent profitability reduces risk considerably.
Some growth companies, like Mastercard (MA), pay a tiny dividend. Others, like Google (GOOG) and Facebook (META), just initiated dividends. Tesla (TSLA) and Amazon (AZMN) still do not pay dividends.
Your growth allocation aims to provide top cover for your dividend and income stocks so they can do what they do best: produce income.
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Dividend growth for the win. Now, things are beginning to get interesting. Dividend growth investing is a vital part of your retirement planning.
Dividend growth investing is a mix between growth and income. The company grows by increasing its long-term profitability and paying more dividends to shareholders.
As a long-term shareholder, you will reap the benefits of increasing share prices, higher dividend payouts, and the compounding effect.
You can’t predict which company will be around for 40 years, but you can surely try. Pick companies with a solid track record of dividend raises and a unique niche.
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Some companies I would purchase for my son (he is 18) are Home Depot (HD), Lowes (LOW), Kenvue (KVUE), Abbvie (ABBV), and T-Mobile (TMUS).
You will turn off dividend reinvestment during retirement and let the dividends finance your lifestyle. With a 40% allocation, you set yourself up for a massive passive income stream from dividends.
Welcome to income investing. Now to my favorite part—income investing. I am a hardcore income investor, through and through.
Everyone needs an income stream to survive; why not make it dividends? Income investors seek current income from fixed-income sources and high-yield products.
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I know what it’s like to be a broke husband and father, waiting on a paycheck to purchase necessities for my family. It’s not fun.
In my 20s and 30s, I only wanted more income. However, I didn’t know about income investing, so I struggled to get a proper financial footing.
Once I discovered income investing, something clicked. I could create a massive income stream that would fund everything I wanted. If I couldn’t spend all the money, I could reinvest to grow my income stream even more.
Today, I earn $2,200/month in dividends, mainly from income investing products like closed-end funds, preferred shares, mortgage REITs, dividend ETFs, business development companies, and high-yield dividend companies.
Although income investing will only represent 20% of your stock market portfolio in your 20s, it will consist of all your spendable dividend income. You should reinvest all other dividends.
How to Control Your Spending 102
The goal throughout your 20s is to build a solid income stream that you can grow throughout your 30s and 40s. A goal of leaving your 20s earning $500/month in dividends is achievable.
For reference, to achieve $500/month from dividends at a 9% yield, you would need to invest $66,666. It seems like a lot, but it is very possible.
Putting it all together. You now have a fantastic portfolio that most 20-year-olds could only dream of. However, there is one elephant in the room.
It is incredibly challenging for young people to invest in boring stocks. Most want to double or triple their money in a year, which is simply unrealistic.
Instead, aim to grow your portfolio by 10% each year; this is much more reasonable, realistic, and boring. Once you slow yourself down, you’ll find it much easier to save and invest when you can achieve your goals.
The Pros & Cons of Homeownership #1
Conclusion. Time is the only way to win as an investor. In your 20s, you have nothing but time to grow your portfolio and build your wealth slowly.
I bought my first dividend stock in 2019 when I was 38, 20 years after I should have. I purchased my first product from Amazon in 2001 when I was 20. Imagine if I had bought Amazon stock instead.
The goal isn’t to be a perfect investor; it’s to get money into the markets. Something good is bound to happen at some point throughout the years.
Remember your allocations: speculation (10%), growth (30%), dividend growth (40%), and income investing (20%).
You don’t need to conduct a hard rebalance every few years. Instead, you can orientate new money toward your new allocation percentages.
Ultimately, getting money into your brokerage accounts in your 20s is always a win. Either you’ll get rich or learn a lesson; you win either way. Don’t overthink it. Good Luck!
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