Wednesday, January 15, 2014

Three Streams of Dividends and Income Investing

TheMoneyMadam’s Dividend and Income strategy for creating steady, ever increasing income uses stock and bond investments.

Once you convince yourself that at least part of your invested money needs to create income, you should seriously consider learning about my strategy; TheMoneyMadam's strategy.

Three Income Streams:

·         Dividend Machines
·         Covered Calls on Dividend Stocks
·         Discount Bonds


One income stream is dividends from companies I call Dividend Machines.  Always buy stock in a company that pays a dividend that easily beats the yield on the 10 year U.S. Treasury. Make sure the dividend per share is greater than the company earns per share. 

In 2014, the monthly cash flow I need to pay my basic bills comes from stocks with at least a 3.5 percent dividend yield.  Moreover, I select companies that have a history of increasing the dividend every year.   Inflation is inevitable and you must have income that increases.  D/E ratio should be less than one or less than the industry average.

You need to realize that rising bond interest income competes with stock dividend income.   Careful research will reveal stocks that increased the dividend even during times of rising interest rate.


My second income stream comes from an option strategy of selling covered calls; sometimes referred to as “writing covered calls.”  When you own at least 100 shares of a stock, someone else may want to buy that stock from you at a set price called the strike price.  The call option buyer thinks the stock price is going to be higher in the future than it is when they pay you for the option to buy your shares at the strike price.

When I find a company with the fundamentals that suggest it could be a Dividend Machine, but it fails on either current dividend yield or history of dividend increases, I look to covered call income opportunity.

The nice thing about this approach is that if you are stuck with the stock after you pocket your call option income, you still have an income producer.   This second source of income requires more work than investing in Dividend Machines.   However, when you find a winner (see QCOM call history) you will enjoy the experience.  


My third income stream is interest from bonds.  In the 1980’s it was my first source of income because bonds paid north of 15 percent back then.   Today, we are facing the potential of rising interest rates.

Buying a bond means you lend your money to a company or a government.  Although currently bonds are quite expensive which means the interest income is 3 percent instead of 15 percent, you can still find a few bonds yielding enough to supplement your cash flow and give you some risk diversification and some capital gain opportunities.  However, you must always buy a bond at a discount to par.  

Most bonds are priced at $100 per bond.  You want to buy at less than $100 per bond and if you hold that bond to maturity and if it pays off, you automatically get a capital gain and you bank the interest income for every day that you own that bond.

Consider bonds of the same companies you research for dividend income that may not quite quality as good enough to own the stock but solid enough to lend them some money.  Buy multiple bonds with varied maturities for instance one bond might mature in three years, another in five years, and another in seven years.   This spreading out of the bond maturities is called “laddering” bonds.

For investors with high taxable income and or investors who have their savings in non-retirement accounts, buying the bonds of a government particularly of a state, county or city is a good option.  Like a corporate bond, you want to lend your money to an entity that is highly likely to pay you back.  Look for insured municipal bonds or bonds from states like Indiana or Texas.  These states are in better financial shape than California.

I do not cover real estate, preferred stocks or private placements in this blog.  But I have a darn good handle on how to create retirement income from Dividend Machines, Covered Calls on dividend stocks and Discount Bonds.


These three income streams can create steady, ever increasing investment income. 

Check in often as I continue to teach about these income streams and give recommendations on stocks, bonds and covered calls.