Finding the Fuel to Energize Income Growth
When I was a little boy, we had a giraffe that we used to see how tall we had grown. Over the years, we grew. We flourished because my mom and dad made certain we had good meals every day, and we were also expected to do some work to strengthen our characters and our bodies. These were the fuel to cause growth. In much the same way, investing requires fuel for growth. This includes some things that are reasonably easy to do if a person has discipline to exercise their investing muscles.
The Easy Fuel Sources
Growing income doesn’t have to be hard. You have to identify sources of cash that can be used to keep your investments growing in a way that will create growing income. Some of these are obvious but I am often amazed at how many people have not taken advantage of all of them.
Income From Working Full-time or Part-time
Work is probably the most obvious way to get cash to fuel income growth. Even while I was in high school, I earned money delivering the Milwaukee Sentinel newspaper. My first job after high school was delivering mail for Nordberg Manufacturing. They paid me $300 per month for that work. Back then there were no 401(k) plans, no IRA’s, no ROTH IRA’s and very few easy options to save money. I had to go to the bank to deposit some of my earnings for the future.
Most individuals and couples haven’t really done a good job creating a budget. As a result, they don’t have a plan for their cash. Cindie and I aren’t in that camp. Cindie earns some income from a part-time baking job. Even working part-time she has been able to put $7,000 per year into her ROTH IRA in the last two years. This means she has $14,000 that can be earning dividends in her ROTH account.
Most of us buy things that wind up on a shelf, in a closet, in the garage or in the basement. Most of it may never be used. Idle assets don’t earn any income, so perhaps you should do an inventory and self some things. Then put the cash from those sales to work in your investment account.
Invest in Investments That Produce Cash
Wise investors buy investments that will become more valuable over time. There are two main kinds of investment strategies to fit that model. One is to buy growth investments that don’t pay a dividend but, hopefully, will grow in value. This is fine, but the only way to get cash from this type of investment is to sell it. Well, there are other ways, but they require more advanced knowledge and skills, so that is for a future post.
The big problem is that growth investing doesn’t give you more cash to buy more investments. You are completely dependent on the price per share going up. Someday, however, when you retire and need income, you may have to sell some shares to get some income. Of course, you can always sell some shares and invest the cash in something that will give you income. That might include CDs, bonds, or dividend stocks and ETFs. I do this from time-to-time, but it is not my primary strategy.
Another strategy is to buy investments that have a dividend growth track record, or at the very least, pay a consistent, reliable dividend. Those dividends, then, can be used to buy more shares of those investments or other investments. This creates an income snowball. As the dividends are reinvested, they increase the total shares of the investment, and this increases the dividend each quarter for that investment. This is a very powerful engine for dividend growth. It is my primary focus for most of our investment portfolio.
Dividend Reinvestment Tips for Growing Income as Fuel for More Investment Purchases
Always reinvest the dividends you receive from your existing investments in the same or new dividend-paying investments. This is the debt snowball in reverse. Instead of reducing debt, you are creating a snowball of increasing income. I think most investors would do well to avoid automatic dividend reinvestment. It is better to make conscious decisions about where you will put your dividend dollars to work. If the market is volatile, it might be prudent to take the $1,000 you made in a month of dividends and place smaller buy orders on days when the market is down or headed down. This is the strategy I use. I rarely pay today’s “market price.” I shop for a price that I believe is reasonable and I am willing to wait patiently before buying more shares.
Also bear in mind that it is also helpful to buy high-yield dividend investments and use the dividends to buy more dividend growth investments. Not every investment has to have internal dividend growth to fuel your overall dividend growth results. For example, some of my positions don’t offer significant dividend growth or share appreciation growth. What they do offer is dividend yields from 5-10%. Some of these also pay monthly dividends, so I receive income every month to buy more investments. This dramatically increases the income over time.
Delay Social Security to Age 70 or Maybe Not!
There is a school of thought that says you should wait until you are 70 to start drawing Social Security. One participant in the Fidelity Community said, “If you are actually interested in guaranteed income growth, the best solution I know of is maximizing Social Security by waiting to age 70 to collect which provides the maximum inflation adjusted income guaranteed for your lifetime (and your spouse if they outlive you) whether or not you have any other assets.”
This person is right. However, there is a small problem with this approach. From age 62-70 your bills don’t go away. You have to have income to pay for the necessities of life. Therefore, I took Social Security early so that those dollars would pay for our groceries, utilities, insurance, and the other basics of life. That allowed me to use the dividends from our investments to buy more investments instead of buying groceries with my dividend income or Cindie’s part-time income. Government data says that the age that most males die is about 74 years old. Therefore, waiting until I was 70 meant that I might not receive more than 3-4 years of Social Security. In fact, I have not yet reached 74, but I have already received $210,841 in Social Security payments. Yes, it is true that my Social Security check was smaller at age 62 than had I waited until I was 70, but the income met the need of covering our living expenses.
The More Difficult Ways to Increase Your Cash for Income Growth Investing
There is more than one way to gain additional income for those who are motivated to learn. I will cover them in future posts. However, the following are the ones that I have found to be most productive. They are more difficult to accomplish, and they will require a bit more time and attention.
- Learn how to trade options and use the options income to buy more dividend growth shares. The best way to start is covered calls, but cash covered puts also can be beneficial.
- Convert assets from a traditional IRA to a ROTH IRA, increasing income by decreasing income taxes in the future.
- Invest in a subscription like Seeking Alpha. When it comes to saving and making money, you should wisely spend for solutions that can give you the information you need to make investing decisions that will increase your income.
- After you learn how to invest, then terminate your investment advisor. Before you do that, start by reading some good books about investing in general and dividend investing in particular. The books may cost a bit, but they will be less costly than the year-after-year charges from an advisor. Another participant in the Fidelity Community said this: “What has worked for me? Continuing education. Reading and research. Staying current. Being involved with my portfolio.”
- There are certainly many other possibilities. You can buy, renovate, and sell properties. You can buy properties and rent them out. Sell stuff on eBay. Buy a laundromat and collect the money from the machines. Write a book and have it published. The list is probably endless, but I don’t like the amount of time and effort most of these will require.
What Might You Do?
If I can offer a suggestion, it would be this: Read a book about investing. Start with John Bogle’s The Little Book of Common-Sense Investing. Then, if you need more suggestions, ask and I will answer. However, you can learn a great deal from reading what various authors on Seeking Alpha have to say as they review various stocks and ETFs. It is almost like having your own investing club membership. There are some authors on Seeking Alpha that focus on dividend and dividend-growth investments.
I have very little of our investment dollars sitting in a savings account or CDs. I believe it is best to stay at least 95% invested in stocks and good income ETFs. You only have to look at my top ten investments to see that I like income investments.
Have a Happy Thanksgiving! I will be back on Monday with the next installment of this series
very good, I am VERY interested in learning options…, thanks, lawnman
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Thanks for the feedback, Randy. I have written some articles in the past about options trading. However, I plan to revisit the topic because I have refined my process so as to maximize profit per transaction. In the meantime, you might want to look at some of the things I have written during my options trading journey. The following link focuses only on the posts that include “Options Trading”: https://proverbs27flocks.com/category/options-trading/
Also, if you scroll down on my main page, look for the Categories for “Selling Puts..” That will take you to a subset of articles about that type of options trades. 99% of my trades are covered calls at this time. I do a few cash covered puts when I want to enter a position, but don’t want to pay the current market price. So instead of entering a buy limit order, I enter a cash covered put order to get some cash for the potential of buying the shares at a price I like.
I’m looking at the Seeking Alpha subscription. Hopefully, it won’t be too much for a novice like myself! 🙂
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I’ve heard from another investor that they are offering new subscribers steep discounts for the one-year subscription. 🙂
You heard correctly. 83% off!
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