Building an Investing Income Stream

investing income streamOne of the most common questions asked of me throughout 2012 was how I built my investing income stream and how does it generate so much income for me?  If you look through my Income Reports, you’ll see that I made over $15,000 investing last year – $8,200 with dividends and $6,800 with capital gains  on positions I sold.

So how did I build this awesome income stream?  Here is what I’ve done to build a (almost) passive investing income.

 

Stash it Away!

One of the coolest comments I got this past year was from a reader who thought I had a huge portfolio and was earning just 1% on it – so my $8,000 in dividends meant I had an $800,000 portfolio.  While I wish I did, I’m definitely not there yet.

For this my multiple income stream reports, I only highlight the income I’ve earned in my regular investments and my IRA.  I have an employer-sponsored 401k, but my investment options are terrible and I’m not in anything dividend paying.

I’ve built my portfolio in a few simple ways, that anyone can do with time on their side:

  • I contributed the max to my IRA every year since 2005.  
  • I’ve made it a point to invest most of my side earnings since I don’t need the income (since I still have a primary job).  As you can see in 2012, this was over $30,000.

Doing these two strategies over time, I’ve build up a solid investment position of over $250,000 in just a few years, even with some big Black Swan Events in the middle.

 

Putting Together an Investing Income Stream

I consider myself to be a value and income investor.  I like to invest in companies that I believe to be undervalued for a variety of reasons:

  • Short term fear
  • Un-priced potential of future results
  • Macro-economic trends

When I talk about my best investing day ever, it revolves around these ideas.

But even with value in mind, I also like to invest in dividend paying companies.  I personally like to be compensated for owning shares in a company and tying my money up.

I also favor current market trends for investing in dividend paying stocks.  I practice what I talk about at The College Investor, and so some of my current favorites are Agency REITs, MLPs, and Utility Stocks.  Many of these investments currently offer very high dividend yields, which is why you see so much income from dividends.

I also report dividends when they are received, so since many of these companies pay their dividends quarterly, that is why you see some months with much higher dividend payouts than other months.

 

My Current Portfolio

I know you will ask, so I thought I’d share my current portfolio positions so that you could get a sense of where I stand, and why I’ve invested in what I have.  I’m a huge believer in that you should love the companies you invest in, and I certainly do.

Stocks

  • Abbott Labs (ABT)/AbbVie (ABBV)/Hospira (HSP) – I lumped these all together because they were once the same company.  I’ve owned Abbott for a long time, and love the business model and cash flow.  It will be interesting to see how the most recent spin-off changes things (if it does at all).  I’ve also gained over 40% since owning these companies, so I’ve enjoyed the run!
  • American States Water Company (AWR) – This is my newest addition to the portfolio, coming in the middle of 2012.  I like utilities, I like scarcity, and I like government contracts.  American States Water Company has all of these going for it because it deals in a scarce resource and it’s number one customer is the US Government.
  • Chevron (CVX) – I bought both Chevron and Exxon Mobile right after the BP Oil Spill when all the industry was getting pummeled by the Street for fears of new regulation and potential bans.  Well, none of that came true, and both companies have been growing nicely, increasing in share price, and paying nice dividends.
  • Exxon Mobile (XOM) – This is the biggest player in the space, so I bought it for the same reasons as above.
  • Monsanto (MON) – Once again, I like monopolies and scarce resources.  Monsanto, comment how you will on their business practices, does have a sudo-monopoly on farmers.  While critics say this is a bad thing, I think it is a good thing as an investor.  Plus, this company pays a nice dividend and has returned over 60% for me.  Plus, this is my second time investing in the company.  My first time investing in it returned over 500%!

REITs

  • American Capital Agency Corporation (AGNC) – I like REITs right now as long as interest rates stay low.  They make their money by borrowing cheap, buying government backed mortgages, and then profiting on the spread.  I like Agency paper because there is no principal risk, since the loans are insured.  That is what distinguishes these REITs from other ones, who may invest in commercial paper or Jumbo home loans that aren’t insured.  
  • Two Harbors Investment Corporation (TWO) – For the same reason I invest in American Capital Agency, I invest in Two Harbors.  The same basic investment philosophy, but this was a less known REIT that wasn’t bought-up like AGNC was.  This was a later investment than AGNC, and has performed very well.

MLPs

  • Northern Tier Energy (NTI) – I bought into NTI when I got into AWR last year.  I like that Northern Tier is both into refining and storage and also retail operations.  This gives it some flexibility to capitalize on multiple parts of the energy market.  It also operates as one of the closest refiners to Canada in the United States, which bodes well with the potential from the oil sands pipeline projects. 
  • Kinder Morgan (KMR) – This is the LLC version of the pipeline operator since this is invested in my IRA.  This has been a great play for several years, and I plan to continue to hold it.  With energy prices only going up over the long term (it’s a scarce resource), this should work well for years to come.

 

What’s Missing?

You’ll notice that I don’t list any mutual funds or ETFs, and you’re correct.  I do own two funds, and they are to provide stability against any potential losses to my portfolio.  I hold both of these in my wife’s account, since we agreed before we got married that she would like to maintain a slow, steady, and diversified approach to investing, while I could focus on doing what I do best.

In these accounts, we own Fidelity Growth Company (FDGRX) and Vanguard Total Stock Market Index (VITSX).  My wife’s position are smaller than mine, because the growth hasn’t been there like my portfolio, but we have both contributed regularly to our IRAs over the same period of time.

The income from these mutual funds is pretty minimal compared to the dividends of the rest of the portfolio.

 

How Do I Continue To Invest?

I’m a lump sum investor.  You can read my article on lump sum investing versus dollar-cost averaging, but basically, I save up the dividends and I invest in new companies.  I like to keep cash on hand to be able to take care of market opportunities as they arise.

A good example is AGNC.  This REIT got very expensive as more investors plowed into the market.  If I was reinvesting the high dividend yield, I would have bought and high prices and probably lost money at this point in time (at least on share price alone).  However, I was able to take my earnings and invest in TWO, which was priced much better and had a similar dividend yield and mortgage portfolio.  As a result, I’ve seen a nice return on TWO, while still maintaining my initial position in AGNC.

If I don’t have anything to invest in at a given time, that’s okay!  I’d rather keep the cash and wait for a solid opportunity to invest, rather than just investing “because”.  That just doesn’t make sense to me.

 

I’d love to hear your thoughts on my investing income stream!  This isn’t meant to be investing advice, but rather my story on how I’ve build up a nice dividend paying portfolio that is becoming a solid income stream for me!

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Comments

  1. I was about to confidently reply with how I am doing the same thing as you but after reading your post I am rather embarrassed that I am only investing in micro loan companies. Companies who loan my money out to people and I receive a share of the interest they repay. 🙂

  2. My approach is different! I invested for growth and mostly in mutual funds. I have some stocks and I earn dividends and capital gains, although I reinvest them into more shares of stock or mutual fund shares.

  3. My strategy is somewhat similar. I have about 12-14 blue chip stocks, most of them dividend-paying (JNJ, VZ, XOM, WMT, PEP, MO, MCD, etc.), some of them tech growth (AAPL, GOOG, AMZN), though I’m a dollar-cost-average type of guy. It’s what works for me.

    I have been meaning to get invested in REITs and will have to check out the ones you highlighted here. The problem I have with reading other people’s strategies is that it makes me want to go out and buy more stocks!

    Nice post.

  4. Personally I’m a fan of re-investing my dividends when they’re paid out. If the price happens to drop to an attractive level on top of that I have no problem buying another chunk of shares with the cash I’ve been putting into my investment accounts.

  5. Great tips here! I love your portfolio! I have similar holdings in oil/gas and reit’s, in addition I hold a tech stock and am now looking to pick up a healthcare stock at the right moment soon.

  6. Hi. Just wondered if you’ve ever considered investing in a business, perhaps as a silent partner? The risks are obviously higher, but the return can be so much greater if it works out.

    • Yes I have thought about it, but I haven’t found the right business. And even if I did, when it came time to pull the trigger, I don’t know if I would. Have you invested in a business?

  7. I thought these statements were interesting “I consider myself to be a value and income investor. I like to invest in companies that I believe to be undervalued…” and “but even with value in mind, I also like to invest in dividend paying companies.”

    I have a similar mindset. I believe dividends really do matter. One only has to build a dataset of the Real (inflation adjusted) S&P500 to realise there has been no real capital gain for a long long time. With this in mind with a portion of my portfolio I’ve been building what is known as a HYP (a High Yield Portfolio).

    I’m sure you’ve heard of it but if not it could be worth a Google.

    Cheers
    RIT

  8. Great tips! Good job with your dividend money last year. That’s impressive that you derived more money from that than capital gains. CVX is a great stock!

  9. Good job on the gains! We made just over 9% overall on our portfolio. Every year the portfolio grows… and every year our gains grow =)

  10. Great methods to generate passive income. Do you use options at all to help generate more income?

    • I have used covered calls to generate income on the side, but I haven’t done it lately in the rebounding market. I usually do it when the market is stagnant.

  11. I do the exact same thing when investing. I am saving cash and received dividends and wait for my stocks to come down to a price level where I am comfortable to buy more shares or initiate a new position. If none of the stock goes down to my buy zone I am either selling puts or calls, looking for another company (new position) or stay aside.

  12. Arlen H says:

    Love your website, thanks!

    I can’t help pointing out that you should change “sudo” to “pseudo”

    ” Monsanto (MON) – Once again, I like monopolies and scarce resources. Monsanto, comment how you will on their business practices, does have a sudo-monopoly on farmers. “

  13. I just stumbled on this post some 9 months after you posted and wondered where things stand for you now. REITs and Utilities have taken some beatings and wondered if you have already gotten out of them or what changes you have been making lately.

    • I minimized several of my REIT positions, switched to a hybrid REIT and bought low, and maintained my same utility exposure. The economy is still weak and I’m not worried about these positions in the short run.

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