Building An Income Portfolio

So you want to build an income portfolio, where do you start? Let's take a look at the anatomy of The Income Method.

Build A Foundation

What is the most important part of your house? Well, you might not think about it very frequently, but without a good foundation, your house is not going to be useful for very long. Foundations provide stability and rigidity to the entire home.

We recommend a foundation of 30-50% fixed-income investments, including preferred shares, bonds, baby bonds, and bond funds. These picks are higher up the corporate structure so their dividends/interest payments are much safer than common equity dividends. We can count on this base to smooth out any volatility in our portfolio and provide us with consistent income even in the most turbulent times. You should never count out the benefit of being able to take a break from the market knowing your income will not fail you if you ever become overwhelmed.

Our preferred portfolio includes over 50 picks, currently yielding over 7.5%. We are always on the lookout for opportunities to buy and hold at higher yields. In March/April 2020, we were able to add shares of preferred at some incredibly silly 30%+ yields.

The main purpose of these investments is to provide stable income and ensure that our portfolio has consistent recurring cash-flow. Being able to take advantage of an irrational market and get some capital gains is always a cherry on top. 

Immediate Income

We are looking for income today. Dividend growth is great if you need money in a few decades, I want cash before my life insurance policy pays out. Many are surprised to learn just how many opportunities there are with 8-10% dividend yields, and these picks make up the core of the HDO model portfolio. 

Many corporate structures lend themselves to sustainable high-yields. Real Estate Investment Trusts (REITs), Closed End Funds (CEFs), Business Development Corps (BDCs), and Master Limited Partnerships (MLPs) are some of the structures where a large portion of total returns will come through dividends. 

Dividend Growers

Most dividend growth stocks trade at high prices and therefore low yields. We are not interested in investing at a 3% yield and waiting 20 years to get a reasonable dividend. However, dividend growth stocks do go on sale. When an event sends a dividend growth stock to 5-7% yields, by all means take advantage of the opportunity! 

Long-term Value Picks

These are investments in sectors that are out of favor with the market and are trading at deep value prices. These picks tend to have very high-dividends, in excess of 10%, and more price volatility. We can hold with confidence due to the greater stability of the rest of our portfolio, and our assessment of the underlying fundamentals.

These picks pay high dividends and provide a very high chance of large capital gains. Yet being out of favor they can have extreme volatility. These picks are often favorites for discussion due to their high-yields, but it is important to remember how volatile they can be and ensure that you have a solid base of picks from the other categories. In the portfolio tracker, these will be labeled "High" risk and the size of allocations should match an individuals risk tolerance. 

Compound Returns

You are likely familiar with the power of compounding. I am often asked whether investors should DRIP and reinvest in the same stocks they already hold. While this is a very effective investment method, it is not the best. After all, the investments you currently hold are not necessarily the best opportunities in the market today.

We recommend taking distributions in cash and manually reinvesting. Each week, we provide a feature to members entitled "Picks Of The Week", these are the picks in our portfolio that our team is looking at buying in the coming week. This weekly feature is a great resource to look to for deciding which picks to target for initially building a portfolio or reinvesting your dividends.