Few things are more satisfying to an investor then seeing cash get deposited into your brokerage account from income generating assets that you own.
Income producing assets come in all shapes and sizes and it is important to know which ones best align with your style of investing.
A dividend portfolio of high-quality stocks is usually always a part of an investor’s income generating assets. But building a dividend portfolio can be risky if you are not careful. Many folks do know how to build a dividend portfolio, and in turn just look for stocks with the highest yields without fully understanding the risk that they are taking.
But if you genuinely want to build a diversified portfolio of income generating assets there are many other assets beyond dividend stocks to consider for investing your hard-earned money. Here is a partial list of income generating assets to consider:
Most portfolios of income generating assets will include at least some dividend paying stocks.
But it is important to understand how to build a dividend portfolio, such that it is safe and sustainable. If you are building a dividend portfolio the right way, you will sleep better at night and likely get a higher return on your investment.
Here are the characteristics to look for in a good dividend paying stocks:
One of the most attractive dividend stocks right now is Lockheed Martin Corporation (ticker LMT). Lockheed is an American aerospace, defense, arms, security, and advanced technologies company, with revenues of approximately $60 billion
Its current dividend yield is just under 3% and it has a very safe payout ratio of just 40%. Lockheed Martin takes its dividend commitment to its shareholders seriously, having increased it annually for the last 18 years.
Much of Lockheed Martin’s products are sold to the federal government and its allies. This is an industry where the products may change over time, but the demand will always be there.
Bonds are safer than stocks in that bondholders need to be paid first. Bondholders are creditors of the company, all of which need to be paid before any dividends get paid to shareholders.
The negative about bonds is that your maximum return on a bond is to collect your interest payments and then be repaid your principal. Unlike shareholders there is no price appreciation if the business does well.
Although most portfolios of income generating assets should include some bonds to act as a ballast, the stream of income generated by bonds is quite low.
A ten-year United States Government bond yields just over 1%. Corporate bond yields are a bit higher, but we would not recommend purchasing individual corporate bonds for all but the savviest investors. Better to buy them as part of a bond fund or balanced mutual fund as discussed below.
Some investors do not want the hassle of picking individual stocks and bonds. These investors instead prefer to build their income producing investment portfolio by investing in a balanced mutual fund.
These balanced mutual funds provide long term cash flow for the investor, while giving them exposure to stocks and bonds.
Mutual funds are financial vehicles that accumulate investors’ money to buy a diversified portfolio of assets. There are more then 8,000 mutual funds in the United States these days. Which ones are considered balanced funds that invest in stocks and bonds? And which are the balanced funds that have a long track record of building its investors’ net worth with stock market index fund leading returns? We have your answers just below.
Balanced Mutual Fund #1 – Vanguard Wellington (ticker VWELX) – Talk about longevity, the Vanguard Wellington mutual fund goes all the way back to 1929, so it has seen some crazy economic cycles. And through it all, it has averaged an annual 9.11% return for its investors. Recent performance has been just as steady with its last five years performance averaging 11.5%.
Vanguard Wellington is a large fund with $112 billion in assets, and is 67% in stocks, 30% in bonds and 3% in cash. It pays a dividend of approximately 2% and its portfolio consists of some of the best iconic brands on the market today, such as Microsoft, Apple, Facebook, and McDonalds.
If we had one balanced mutual fund to recommend for the next five years, it would be Vanguard Wellington.
Balanced Mutual Fund #2 – American Balanced Fund (ticker ABALX) – Another large balanced mutual fund with a strong track record of performance. ABALX is a large fund with $185 billion in assets. It invests approximately 60% in equities and 40% bonds, and currently yields about 1.3%.
Its portfolio consists of household names such as Microsoft, United Health and Phillip Morris to name a few.
ABALX has averaged about 11% annually for its investors over each of the last five years so its performance has been outstanding.
A certificate of deposit is a product sold by a bank or credit union whereby the investor agrees to give the financial institution their money in exchange for an interest rate that is generally higher than what the investor would get for a regular savings account.
There are two positive attributes for a certificate of deposit. The first is that you get a higher interest rate then what you would otherwise get from the financial institution from a savings account. The second positive is that the certificate of deposit is insured by the deferral government up to $250,000, so there is no default risk.
There are two negative attributes for a certificate of deposit. The first is that you cannot get your money back until the end of a fixed agreed to future date. The second negative is that interest rates on certificates of deposit have gotten very low so as to almost not be worth the trouble. A quick scan of the current interest rates offered show that you would need to tie your money up for a year to get approximately .5% (one-half of one percent).
Such a low interest rate is hardly the way to go about building wealth.
Ten years ago, the idea to invest in startups was limited to an elite group of accredited investors and venture capital funds. Things got a lot simpler for individual investors in 2012 when Congress passed the JOBS Act, which eased the country’s security regulations.
With the passing of the JOBS act, non-accredited investors (which is most of us) can invest between $2,000 and $100,000 annually (depending on your annual income and net worth) in startups businesses.
This was a huge step for the smaller investor who previously was shut out of most of these startup deals.
With the passing of the legislation in 2012, a new mini-industry call crowdfunding sprung up for this new type of smaller investor. Crowdfunding is a great name describing the investing of small amounts by a large number of investors to fund various businesses, including startups. These investments can be in the form of debt or equity depending on the needs of the businesses.
You can now go on to many online investing platforms to review prospectuses, perform due diligence and invest in these kinds of startups. All the information you need to make an investment decision is right there on the funding portal. You might be asked to invest in stock, debt, or convertible debt, but either way you get to perform due diligence and decide.
Look at the website for crowdfunding platforms like CircleUP and SeedInvest to find out more.
There are more than 48 million rental housing units in the United States. While many of them are owned by large real estate businesses, quite a few of them are owned by individual investors. Have you ever considered being a landlord and buying real estate as an income generating asset?
With a rental property like single family homes, the idea is to fund the purchase via a down payment as your investment and fund the rest with bank debt. If properly structured, the rental income from the property will cover your mortgage and other related expenses, leaving you with some extra cash each month. This net cash flow from rental activities combined with the (hopefully) appreciation on the property over time could generate a very attractive return on your investment.
The pros on owning a rental property is the ability to generate an attractive return on your investment, combined with the idea of you being a small business owner.
The negatives on owning a rental property is that you will need to work hard for the attractive returns and none of it is guaranteed. If you lose your tenants, you will still need to make your mortgage payment out of your own pocket.
Summary
There are many ways to build a portfolio of income generating assets.
The key is to focus high quality assets, so you sleep well at night.
Do not be afraid to diversify across different assets classes to generate a safe stream of income for your needs.
Use the examples discussed above as you do your research in this area.
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