My biggest investing mistake was not learning about creating scalable income sooner in life. In my twenties and most of my thirties I believed the right thing to do was maniacally save and invest in mutual and bond funds. By my late thirties I began doing the calculations and realized that other than my real estate investments, my savings had not really grown. Any real gains came form stock options with my employers and from joining a start-up that was acquired. I was embarrassed and frustrated with myself and with the financial investment industry.
I decided to throw out everything I knew about investing and sold all of my mutual funds and bonds and went into a cash position. For months I read every website, book, and article on investment strategies I could find. I joined a local investment club to learn as much as possible from others who took control of their own investments and financial strategies. I also discovered that most gains in my mutual funds were going to the fund companies and to my financial advisor in the form of fees and trailer payments. What made it worse is that some funds had hefty redemption fees for selling early.
Very quickly I started learning about scalable income. At the root, scalable income is money that works for you. You can either invest in equities, real estate, businesses, mortgage funds, real estate investment trusts (REITS), or other income generating investments. Instead of buying regular stocks, a scalable income strategy is to buy stocks that pay dividends, and a good strategy is to look for stocks called the “dividend aristocrat” stocks.
Another way to look at scalable income is the structure of how you work or how you put your money to work for you. For instance, if you are a bicycle mechanic you can only repair a fixed number of bicycles per day. If you are paid hourly the only way to increase your income is to work longer hours. However, if you own a chain of bicycle repair stores you can add additional mechanics and add more capacity to repair more bicycles in the same amount of time. However, it takes capital to invest and hire. You have to rent or buy the space, buy the tools and replacement parts, hire good mechanics, and advertise to attract customers. You end up making money on the margins from the sale parts and labour. To scale the business you simply add more mechanics or find less expensive parts, or increase the price of labour. Either way, you have additional levers you can manipulate to scale the income.
I put these principles in place to rebuild my portfolio with dividend stocks on the United States and Canadian equities markets in addition to using tax efficient investment products like flow-through shares to minimize my annual tax liability. Five years later my principal has grown, although with the markets in the past year much of the gains have been erased. However, because I invested in US equities when the Canadian dollar was almost at par with the US dollar I have an unrealized currency gain of about 30% on the US dollar versus the Canadian dollar. But what is more important is that my portfolio has generated about 4% in annual cash dividends. I’ve been able to maximize my annual retirement savings and my children’s education investment and trust funds every year with the cash generated by the dividends. Essentially, I restructured my portfolio to create a steady income stream that funds important future investments for my retirement and for my kids education without touching my employment income.
In my research I also discovered that I didn’t have the patience or time to invest in hedge funds, follow the markets daily, and buy options on speculation of whether or not a stock would rise or fall. Some investors religiously exercise these sophisticated investment vehicles and create impressive annual returns. I don’t have the time or energy and feel there are risks in these strategies I am not willing to take.
I decided to invest in a conservative portfolio of dividend aristocrat stocks. I set my objectives on a conservative 4% to 6% annual growth in principal with and additional 4% in annual income paid via dividends on the principal. Ultimately, my objective is to build a sizeable portfolio that generates as much income as I need to fund my family’s monthly living expenses solely on the dividends or income stream generated by the portfolio. By doing this, I may never need to reduce the principal invested.
For example, if your annual living costs were $40K per year and you had a $1M portfolio generating a 4% yield (or dividend income stream) you would no longer need to work or invest additional money. Of course, this assumes you a paying no taxes. If you need to pay taxes then you need a higher amount or try to obtain a higher yield. I’ve seen some people get as much as 8-9% yield through investment trusts, mortgage funds, and private mortgage loans. Another advantage of the dividend aristocrats is that every year they tend to increase their dividend amount, hence helping offset the cost of living increases. Meaning a $1M portfolio generating a 4% income stream with dividend aristocrat stocks will tend to increase the yield every year. You could see your yield going up to 4.3%, then to 4.6%, and higher over time.
No matter how much money you have, you can start building an income stream today. Dividend paying stocks are easily purchased on the stock market using any online discount brokerage service. If you are not comfortable researching and selecting the individual stocks you can buy ETFs that have lower fees than mutual funds and provide baskets of dividend paying stocks. And to scale the income, you simply add more shares and seek higher yields.
I wish someone had told me about building a scalable income strategy much earlier in life. I hope you found this information helpful.
Note: many people call this a passive income investment strategy. The point I am making is that income can also scale with the right strategy.