You need to earn 10% interest on your investments to beat inflation while paying taxes. However, there are many different ways to generate 10% annual returns.
You can take the growth model, investing in index funds and growth stocks like Facebook (META) and Amazon (AMZN).
My favorite way to invest is in high-yielding products that yield 8-12%. These products can also give you some capital gains. Why do I prefer to collect my compound interest in the form of dividends?
Get Past the Middle Class
Welcome back to the Retiring on Dividends series (101, 102), where we use the power of compounding to live our dream lives.
The magic of high-yield investing. I immediately fell in love with high-yield dividend growth investing when I read about it in 2019.
Many people love the idea of companies growing their annual dividend at elevated levels for 20 to 30 years. Instead, I want my money now.
For example, let’s say Microsoft (MSFT) pays a 1% dividend but increases the payment by 10% every year. On the flip side, AT&T (T) pays an 8% dividend but increases it by 1% each year. I prefer AT&T.
Your portfolio can accommodate both investments. However, you must understand the balance between growth and income to be a great investor.
Down-sized? Time to Start an Online Business
The magic of high-yield DGI is that you can start using your dividends today. I’m all about current income; I want to be able to use my dividends in daily life.
You may see me refer to high-yield dividend growth investing (DGI) as income investing because they are very similar. With DGI, you focus on companies with big dividend payments. Income investing focuses on high-yield products like bonds, preferred shares, REITs, and closed-end funds.
High-yield companies. High-yield companies can give you current income and some minor capital gains. However, like preferred shares, you can find times when the market mispriced these companies. This allows you to start compounding at lower prices.
The first step is to create a list of high-yield companies you would love to purchase. Some of my favorites are Kinder Morgan (KMI), AT&T (T), Verizon (VZ), Altria (MO), Philip Morris (PM), and British Tobacco (BTI).
The American Dream is Passive Income
Many of these companies will fall out of favor for various reasons. They are mature companies with large profits. However, the stock market runs on growth.
If you are not growing, you are dying. Over the past year, I have found great prices on AT&T (T), Verizon (VZ), and Pfizer (PFE). You can get great companies at low prices. Remember, you lock in your profits when you buy, not sell—meaning focus on price.
How to purchase high-yield DGI stocks. You can wait for a great price. You can also dollar-cost average into your position. Dollar-cost averaging is one of the four principles of DGI.
Another great way to purchase high-yield DGI stocks is by selling cash-secured puts. I first read about this process in the book “Make Your Family Rich.”
Individual Preferred Shares vs. Preferred Funds
The idea is to wait until your favorite DGI stocks drop 5-10%. That means their yields are already juicy. Once the price drops, you sell a cash-secured put to obtain an even lower price.
You keep selling puts until the price falls past your strike price, and you collect shares. Now, you have increased the yield on an already high-yield product.
Let’s do an example of selling cash-secured puts. Let’s say I want to purchase 100 shares of one of my favorite high-yielders, Altria (MO). The current price is $49.60.
I will sell one cash-secured put at the strike price of $48. The “bid” for each share is $0.48. Therefore, I would receive $48 for my put. I would need to hold $4,800 in my account until my option expires.
Homeschooling + Online Business
Let’s say I do three rounds of puts before someone finally issues me shares. MO’s annual dividend is $3.92. After one year, I would have collected $392 in dividends plus the $144 in options premiums.
The total income for this position would have been $536, for a yield of 11.16%. Don’t forget that I might also have some capital gains along the way.
High yield over high growth. I prefer high-yield investing over high-growth for one reason: life. High-growth investing works when you don’t need to touch your shares.
As someone with a wife, two kids, and four houses, I know all too well about life. Life is what happens when you are busy planning.
So often, I find myself with money in my 401 (k) but need cash to solve current problems. I had to borrow against my 401 (k) three times over 20 years.
Wiping the Debt of Christmas Past
However, I had enough money to get through the tough spots once I started income investing. Yes, having an emergency fund is nice, but that is not the answer.
Emergency funds are for emergencies. There is almost no time when you should use your emergency fund outside of emergency travel or medical expenses.
The true answer is current income. I need to have cash flow at my fingertips. If I don’t need the money that month, I can reinvest it into more income-producing products.
Let’s test this by investing $100,000 in AT&T (T) and $100,000 in Microsoft (MSFT). Our AT&T investment would generate $5,790 in annual income, or $482 per month.
Our Microsoft investment would generate $700 annual income, or $58 monthly. As someone living your life, which would help you more today?
I’m Obsessed with Money
Microsoft will kick AT&T’s but in total returns, but that doesn’t matter if you need to sell shares of MSFT to generate income. The answer lies somewhere in the middle: allocation of $80,000 to AT&T and $20,000 to MSFT.
Think of high-yield products like bonds with a chance to appreciate. You can follow the business and see how its profits increase over time.
Always remember the rule of 72. This rule states that if you divide 72 by the yield, it will tell you how long it would take to recoup your initial investment.
Welcome to Writing
If AT&T yields 6%, it would take 12 years to recoup your initial investment via dividend income. Once you have all of your original money back, your investment is in an infinite return.
Conclusion. As an income investor, I aim to get my initial return back as soon as possible without selling shares. After receiving my $100,000 back from AT&T via dividends, everything else is a bonus.
Many people focus on total returns, where the stock price jumps to an astronomical number; this is great until you “realize” those gains by selling.
As a real estate investor, it’s great to have the value of my home keep rising. However, in reality, it doesn’t do much for me.
The Bonds of Thanksgiving
Conversely, if the value of my rents keep rising, it is helping me to live a better life. I can use this money to assist with paying bills, going on vacation, or reinvesting into more income.
With high-yield dividend growth investing, your main focus is on current income. You don’t invest in AT&T for tremendous growth for the next 40 years.
You purchased AT&T and Verizon for a high level of current income. You can use these assets to improve your family’s situation today.
I am a massive fan of getting paid today. I do, however, have investments for tomorrow. But, as long as I can fund my adventures today, my future looks bright. Good Luck!
- PDF of the Month: Don’t Gamble with Retirement 12 (Free 460-Page PDF)
- Free PDF Downloads: Download FREE PDF LIST here
- Financial Mindset: Become CEO of Yourself 2 (Free 196-Page PDF)
- Retirement Planning: Your Retirement Planning Guide 2 (Free 255-Page PDF)
- Investing: How We Plan to Retire on Dividends 4 (Free 139-Page PDF)
- Cryptocurrencies: Counting on Crypto 2 (Free 159-Page PDF)
- Real Estate: Financial Independence through Real Estate 4 (Free 112-Page PDF)
- Business: Retire Rich, Retire Comfortable with a Business 4 (Free 149-Page PDF)
- Latest DGWR: Don’t Gamble with Retirement 11 (Free 410-Page PDF)
- Everything!: The Biggest Book on Passive Income Ever 4! (book)(Web Edition)(Art Edition)
- Writer’s Comparison: M1 Macbook Air vs. GalaxyBook3 Pro 360
- Read My Books for Free: Free Kindle Books Schedule
- Book Design: Design Tips on YouTube
- Kindle Unlimited: Why I Finally Subscribed Kindle Unlimited (learn more)
- Book Reviews: 505 Takeaways from 101 Books (pdf)
- Writing: The Publishing Chronicles (Part 1, Part 2, Part 3, Part 4, Part 5)
- Best REIT- Fundrise: Fundrise vs. US Treasuries (Join Fundrise)
- Follow us: On our Facebook Page and Join our Facebook Group
- Support the Channel on Cash App: $Kingmarine1981
- For more detailed analysis, join my Youtube: MFI YouTube Channel
PDF of the Month: Don’t Gamble with Retirement 12 (Free 460-Page PDF)
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
Leave a Reply