The Spirit Of The 'Income Method'
By
Rida Morwa
The Spirit Of The 'Income Method'
In almost every article we publish, we mention the words “Income Method”. I want to take the opportunity today to discuss what this means, and review the wider scope of how it works to benefit us all. I hope this helps our readers get into the income investing mindset as well as helps all of us focus and hone in on our goals as a community.
Let's continue striving towards success together!
What Is the Income Method?
Consider this, if you do something well, you want to be paid for it right? Or rewarded in some way? Most of us do!
If I own a company that is doing well, I want to be paid by them. A farmer doesn't own farmland to let it sit and hopefully appreciate in value over time. If the land is fertile, they work it and expect it to yield returns.
A farmer takes their feedstock - the seeds, and plants them into the soil. These seeds sprout and grow into wonder crops, which in turn produce more seeds. The farmland does not need to be sold to pay for bills and expenses. The farmer harvests their crops, reaps the reward, and goes about repeating his process as a profession.
The process of planting, growing, and reaping continues over and over. The new seeds produce new plants, which in turn produce more seeds! Likewise, our income produces capital we can reinvest for more income. No longer are we hand-tied hoping our initial capital will be enough, we can see how our initial capital is growing without any extra work on our part.
The market is a massive plot of land and we get the opportunity to plant our seeds to see a strong return. I don't invest in rocks and desert sand hoping that the land will increase in value. I invest in fertile land and quality seeds that will produce a bountiful yield. The "Income Method" helps us find the right land and seeds so we can have an ever-growing income stream.
Taking a step back into history, we can recognize that the most valuable skills or assets were those that generated a large definitive return. Cows were excellent because of their milk. Chickens for their eggs. Land ownership for the crops.
Moving even further back, the ultimate asset to a person was their skillset, people were hunters and gatherers, always on the move looking for the bare necessities of life. As we move forward in time, humanity discovered ways to remain in one place, but produce more efficient returns with scarce resources.
Everything has value. It might not be much but it is always worth something. Your time has value, your car has value, and your home has value. Yet, I'm not interested in what I can sell these things for. I'm interested in what they provide for me while I own them.
My home provides shelter from the elements, warmth, comfort, and protection from others. It also provides privacy to me and my family. My car enables me to travel distances I couldn't otherwise. These benefits are the primary reasons we own these physical assets.
We do not own them for their value alone. In fact, most people don't pay attention to the value of their house or car until they start looking to buy a new one. But when investing in the markets, many take the opposite perspective. They value their portfolio solely based on what it can be liquidated for at a given second. At High Dividend Investing (‘HDI’), we do not. We value our portfolios based on what it is producing for us, not what the market will pay for it at a given second.
So when we approach the market, we're less concerned about the daily gyrations of value, but about the benefits that holding a stock produces. In this case, the income it provides via real cash returns.
We use the "Income Method" to extract income from the market that others miss. It is a mixture of immediate income investing and value investing. For some of you, those terms are extremely important, for others, they're meaningless. The bottom line is this: The Income Method puts "income first".
How Does the Income Method Work?
One often faulty conclusion when people hear of income investing is that the investor simply screens the market securities by yield and boom, they have their portfolio. This is far from the truth.
We conduct and provide to our members comprehensive reports on the fundamental health of the company in question and its operating sector. We want to know that the dividend, or interest payments, are covered today and will be covered tomorrow. This way, you do not have to worry about the market, and get more time to perfect your hobbies or spend with your family.
Once you've found what to invest in, you must remain cognizant of global themes and market changes. This doesn't mean panic selling but means keeping a watchful eye on the horizon. We provide weekly market updates for exactly this reason. We keep an eye on the markets and global events to keep you informed about the headwinds and tailwinds faced by our income machine.
As your income from your portfolio rolls in, what should you do with it? Good question.
The Income Method works wonders when you have more time to develop it. The longer you are able to reinvest your dividends, the larger your income stream will become. We take our newly minted cash from dividends and put it to work immediately to earn us more cash. This compounding continues to grow your portfolio's income stream and size until retirement. At that point, you can reduce your levels of reinvestment and use your income to meet your needs. Paying your bills from your portfolio, so you no longer have to punch the clock at work, this is the essence of the Income Method.
Dividend Growth vs Income Method
Often we get told that dividend growth investing is superior to immediate income investing. I disagree for a few reasons:
Dividend Growth Investing ('DGI') stocks often trade at a premium due to the assumption of future growth
Many have extremely low yields so their benefit is muted
In retirement, the dividend growth is too slow to catch up
Let's do a quick experiment below to illustrate this.
Immediate Income Investing: 10 years, no reinvestment, 10% yield
Capital Invested | Dividend Yield | Total Cumulative Dividends Received |
$10,000 | 10% | $1,000 |
$10,000 | 10% | $2,000 |
$10,000 | 10% | $3,000 |
$10,000 | 10% | $4,000 |
$10,000 | 10% | $5000 |
$10,000 | 10% | $6,000 |
$10,000 | 10% | $7,000 |
$10,000 | 10% | $8,000 |
$10,000 | 10% | $9,000 |
$10,000 | 10% | $10,000 |
After 10 years, a total of $10,000 worth of dividends have been received. Achieving a total yield of 10% is possible through careful screening and diligence.
Dividend Growth Investing: 10 years, no reinvestment, 5% yield, 8% annual dividend growth
Capital Invested | Dividend Yield | Total Cumulative Dividends Received |
$10,000 | 5% | $500 |
$10,000 | 5.4% | $1,040 |
$10,000 | 5.83% | $1,623 |
$10,000 | 6.3% | $2,253 |
$10,000 | 6.8% | $2,933 |
$10,000 | 7.35% | $3,668 |
$10,000 | 7.93% | $4,461 |
$10,000 | 8.57% | $5,318 |
$10,000 | 9.25% | $6,243 |
$10,000 | 9.99% | $7,242 |
After 10 years of focusing on dividend growth investing, a total of $7,242 worth of dividends have been collected. While this is nothing to scoff at, it is over 25% worse after 10 years than immediate income.
Dividend Investing is Defensive
Not only does dividend investing generate the regular cash flow needed to supplement one's income needs, but dividend investing is a defensive investment style that generates regular cash flows for investors and tends to outperform when markets are volatile. In good times, you can enjoy reliable dividends and income. In bad times, you have plenty of cash flow to reinvest and lock in decades of future income at higher yields than before.
Each dividend received is an irrevocable return to your portfolio that can't be snatched away. Nothing is unrealized with dividend income. It's cash in hand now, you can spend it as you like.
Regardless of the markets rising or falling, you can relax knowing that your income stream is secure and ever-flowing. Often in times of drought, small streams and rivers will dry up and disappear. Yet during the rainy or flood seasons, they suddenly reappear! Building an income stream with dividends is not building a tiny stream that dries up, but it is producing a roaring river, like the Amazon that is ever flowing and has no end.
You Deserve Income Now, So It Works Now
The answer is really simple, you deserve income now. You worked hard for your money, it should work just as hard for you. This will enable you to have a more comfortable retirement and provide more income to reinvest and see growth in your portfolio.
When we look to those who were trailblazers of wealth and riches, they invested and built companies that generated income, and reinvested that income to produce more. They didn't simply hoard cash to retire someday, or to slowly and orderly reduce their assets until they died. They focused on extracting income from their money to make more money.
You have a portfolio, it shouldn't sit and collect dust hoping that you can sell your shares for more than you bought them for. That's not what we do at HDI. We buy high-quality companies producing high levels of income for us now, so we can use that money to live or reinvest as you see fit.
Retirement, in my view, should not be a stressful time. In 2020, were you able to walk away from the market all year and never have to worry about your income stream? Or were you anxiously tied to your portfolio watching every rise and fall in worry and concern?
The outcome of the Income Method is being able to go on a multi-month vacation, never checking your portfolio, and knowing that your income stream is as strong as ever. We do the heavy lifting, so you can enjoy your retirement life.
Go pickup a new hobby, make new friends, and visit family. You can do all that without having to stress and fret about your retirement. That is the by-product of a portfolio using the Income Method to govern its actions.
