This is the summary of Episode 2 of our Roaming Returns Podcast.
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Here’s more information on what income investing is and why it might be the answer to your financial worries.
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Podcast Summary
What Is Income Investing
Income investing is a strategy that focuses on investing in things that generate passive income. It can be anything from dividend stocks to high interest savings accounts and even physical rental properties.
This is very different from what most people consider investing where they hope to find the next Amazon before it takes off. This is a growth investing strategy and if you’ve tried this, you know it’s not that easy.
There are many other types of investing strategies, but income investing is the basis of our success.
How Does Income Investing Work
Focuses On Investments That Generate Income
An income investing strategy mainly focuses on putting your money into assets or vehicles that generate income or interest.
The intention is to provide yourself with a steady monthly cash flow that can be used at any point, or at least that’s the goal for those of us who want to retire early.
There are many different vehicles or types of assets that you can invest your money into.
Examples of places to put your money outside of the stock market
- High interest savings accounts (aka HYSA)
- CDs
- Fundrise
- Worthy Bonds
- Yieldstreet
- Renting out physical real estate
- Private MLPs
- Mutual Funds
Examples of types of different stocks in the stock market
- Preferred Shares
- Bonds
- BDCs
- Public MLPs
- ETFs
- REITs
HYSA companies are always changing rates and competing with one another, so it’s hard to recommend just 1 at any given point.
Worthy Bonds is where we keep our emergency fund because of their high interest rates, business strategy and liquidity. We’re big fans of Worthy.
Sign up using our link to get a free $10 bond. Their rate is usually 5.5% APY but they often have promotions up to 7%.
Income investing relies much less on price valuation because its focus is on consistent payouts over time.
The stock market has great high yielding assets like REITs where you don’t have to own physical real estate to invest in it. And BDCs like $HRZN allow you to participate in companies that lend out money.
Prioritizes Diversification To Reduce Payout Risks
Because consistent payouts are the life blood of an income investor, a company that cuts its divided is bad.
The best ways to avoid dividend cuts is to invest in good companies with a long history of paying consistent dividends and to have the pro
We recently had two dividend cuts for Icahn $IEP and Camping World $CWH.
IEP was an interesting situation. A short seller said it was overvalued which caused a panic. Then it came to light that Carl Icahn had his shares leveraged as collateral. (He’s since fixed this.) He also said that they underestimated how interest rates would affect their business.
Icahn had to cut the dividend in half because it was way too high with the drop in share price. It’s still at 18% and a buy in our opinions. The drop put a hit on our portfolio because IEP made up too much of our holdings.
Camping World cut their dividend by 80% because they’re taking on too much debt acquiring RV dealerships. This makes sense because their in an aggressive growth mode, even though it sucked for us.
Tip #1 – $IEP and $CWH would be perfect candidates to implement dollar-cost averaging since we think they may fall a little further before stabilizing. That approach would allow for a large acquisition of shares before they rebound.
Tip #2 – Don’t use stop losses. Had we had them for either one of these, we would have lost a lot more from the emotional reactions of other investors. If we had a stop loss in for IEP at $30, it would have sold around $20.
Tip #3 – Don’t make emotional decisions. Our portfolio got hit pretty hard when these two stocks cut dividends. Tim waited until he had a clear mind before reacting and formulating a strategy.
Utilizes Reinvesting To Compound Returns
Diversifies risk in portfolio. IEP is a great example. You don’t want too many stocks, but you want enough to prevent portfolio decline.
Please bear with me this is still in progress
Prioritizes Compounding and Reinvesting
Turn those DRIPs on so it does it automatically. It’s like automatic dollar cost averaging. The way the system is set up though, you buy after the price recorrects after the dividends pay out. There’s a way you can manually time this for extra profits if you’re starting with a low investment fund. Liknk to expisode on ex dividends. We also turn DRIPs off if a stock is overvalued and funnel that into other companies that are undervalued.
This allows you to diversify without selling off assets.
The market would have to double what it goes up over a 10 year period to match what dividend payouts could do. plus you don’t have to sell anything to grow your payout amount with reinvesting and compounding. Time horizon is very important.
if you allow to reinvest short term you’ll be set up long term. 90% of the stock market growth is from dividend stocks.
the more frequent the payouts the more you can compound. Frequency of compounding results in more money at the end of the term.
How Does Income Investing Work
Why Income Investing Over Other Types of Investing
The problem with most growth companies is that they tend to be overvalued. Chipotle $CMG is a good example of having a hard time finding when to get in. We can’t justify spending $2,000 on 1 share of a company when you can get many shares of a dividend paying stock that pays 10% yield.
Some investors focus on companies that grow their dividends over time.
For us
consistent passive income, creating a monthly payout without needing to wait for the penalty to fade from a retirement account. also you never have to sell off assets to get proceeds. Penalty
you don’t have to strive for an astronomical number to hope the 4% gives you what you need a year or month from a retirement sum. income investing is already geared for specific monthly income.
you need much much less when you do income investing.
insert chart.
dividends are more consistent than relying on stock prices. There are some outliers like variable dividend payers like one we hold UAN. All stocks are susceptible to news and economic climates, but at least with dividends you get paid while you hold.
Dividend stocks outperform growth stocks and the market as a whole.
easier to get more shares to get more bang for your buck than with growth stocks.
Dividend payouts allow you to buy new shares without needing to put more of your own money in. and without having to sell things you own.
Lower risk for dividend stocks because the dividends help you recoup losses if you don’t get in at the best price. The cost basis in your account isn’t accurate. Have to look at what you put in versus what they’re showing your cost basis because that includes dividend reinvesting. We haven’t been down in value yet since our starting amount. And my mom was still generating 3k a month even during the pandemic when her potrolio lost 12% value when other people lost a lot more.
Genrally long term dividend paying stocks are more resilliant and less likely to go out of business. Generally better companies.
less likely to overpay for dividend stocks. growth stocks get puched up in value. and many types of assets will give you a par or nav price like wiht bonds or close ended funds.
easier to get an undervalued asset than with regular stocks. more control than regular stocks. masses and hysteria can tank good companies.
Speaker 1 emphasizes the importance of prioritizing compounding and reinvesting in income investing, and highlights the delicate balance between diversifying risk and not having too many holdings.
Dividend investing strategies and benefits.
Speaker 2 explains that setting up dividend reinvestment plans (DRIPs) can help investors grow their monthly payouts faster by automatically purchasing shares when they go ex dividend.
Speaker 1 asks if it’s possible to set up DRIPs that pay out before the ex dividend date, potentially resulting in a lower price and a higher return on investment.
Speaker 2: Dividend reinvestment saves time and money, with potential for more than double the monthly payout over a 10-year period compared to growth stocks.
Speaker 1: Dividend stocks with high yields can provide consistent returns over a 10-year period, with the market only averaging 7.6% growth.
Retirement planning and lifestyle choices.
Speaker 2 emphasizes the importance of timeframe when discussing retirement planning, as it affects the portfolio’s growth and compounding before withdrawals.
Speaker 1 suggests that with a $100,000 investment and a willingness to live off less, it’s potentially possible to create a retirement income of around $12,000 per month.
Speaker 2 discusses their coffee habit, mentioning they spend $500/month on coffee at coffee shops despite being able to buy a month’s supply of coffee for $20 on Amazon.
Speaker 1 and Speaker 2 discuss the idea of setting up a dividend reinvestment plan to save money, with Speaker 1 pointing out that this concept can be applied to other addictions as well.
Income investing and retirement accounts.
Investors discuss the benefits of income investing and retirement accounts, with a focus on consistent cash flow and avoiding penalties.
Income investing offers smaller principle requirements compared to traditional retirement strategies.
Dividend stocks and their potential for growth.
Speakers discuss the benefits of dividend investing over stock prices, with a focus on consistency and predictability.
Speaker 1 and Speaker 2 discuss the pros and cons of dividend stocks vs growth stocks, with Speaker 2 arguing that dividend stocks tend to outperform growth stocks over the long term due to their steady growth and compounding factor.
Speaker 2 also mentions that focusing on both dividend and growth stocks can lead to underperformance, and that they prefer to pick one or the other for maximum returns.
Dividend stocks and their benefits.
Speaker 1 emphasizes the importance of monthly dividend paying stocks for faster growth.
Speaker 1 and Speaker 2 discuss Warren Buffett’s investment strategies and how he trims the fat to be efficient and effective.
They also mention that using dividend stocks can be a lower risk option for investors, as they can recoup their investment over time even if the price goes down.
Investing and valuation misconceptions.
Speaker 2 emphasizes the importance of evaluating investments based on their actual value, not just their brokerage account balance.
Speaker 2 and Speaker 1 discuss the benefits of having a retirement account with employer matching, as it provides free money that can help mitigate investment losses.
Speaker 2 explains the misconception of valuation in income investing, using the cow example to illustrate how the value of an asset can change over time without affecting its income-generating potential.
Dividend investing and financial analysis.
Speaker 1 emphasizes the importance of dividend paying companies and fundamental analysis to hedge risk and invest appropriately.
Tim and Speaker 1 discuss the importance of the net asset value (NAV) price in investing, with Speaker 1 explaining that it’s like a personal worth statement for a fund and can help investors determine if they’re paying a premium or discount.
Income investing and its benefits.
Income investing offers more control and stability than other investing methods, according to the speakers.
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