It is not surprising from the name of this site, I demand that my investments have some type of income component. In most cases if I am going to deploy capital I expect an initial return on my capital as opposed to just the hope of future growth. Is this true for all investments? No, of course not as there are no absolutes in life nevertheless investing. Notwithstanding, there are certain types of income invests I’d like to hit eventually.
Types of Income Investments
I am not sure when I’ll move from one step to another but I think it’ll be in a somewhat linear fashion.
Consistent Dividend Growth Stocks
While this blog is obviously new, but I have been growing my dividend portfolio for years (and it was getting to a steady income until I decimated it to pay off debt). I look at this step of the income investment portfolio ladder as the first rung.
It has a particularly low barrier of entry with low expenses. Lets say I buy 12 equally sized lots of $500 (once a month) my total investment costs are limited to $96 for the entire year (12 * $8). If I am investing $6,000 for the year (12 * $500) that ends up being a total expense ratio of 1.63% that is not ongoing! Once I own those shares I never have to pay anyone for the honor of owning them.
The next step once I own enough shares of consistent dividend growth stocks would be to leverage them to create an additional stream of income by using way “out of the money” covered calls to “eek” out additional income to reinvest.
A covered call options contract says that if my 100 shares (1 options contract has 100 shares of the specific equity) hits a certain price (strike price) I am forced to sell it at that price. So lets say I own ABC at $25 a share, I can sell a contract that says if it hits $27 I have to sell, regardless of it whether the stock goes to $30 a share. Since I am selling away my rights of ownership I get paid a premium. If the stock stays below the $27 strike price I would keep my shares and the premium I would take on for selling the contract.
On one hand they are extremely safe – I am not risking any additional dollars, and at the same time am lowering the amount I paid for the stock since I am getting a premium to hold the stock during that contract price. However, on the other hand, I am risking that if the stock skyrockets I will not get to partake in the upswing. If you were to research this type of option play it will state that the risk is unlimited because the stock could go to $0, however, I am going to be reluctant to sell within this account regardless if the price decreases (in fact I could easily argue that as long as the underlying business is not hurt I want the priced to be depressed for a couple of quarters).
I would partake in this kind of options contract right now, but I need 100 shares of an individual position to participate and since selling a lot of my positions early this year it is going to take a while to build my actual share numbers back up to the level where I have 100 shares of any one position. Without some serious leverage (of which I don’t plan) I don’t see this happening for quite a few years.
Ownership of Rental Income
It is inevitable that at some point in my life I will own rental property, however, as one could imagine in the greater New York area it isn’t exactly easy to just buy rental income. That it isn’t to insinuate that it is “easy” anywhere in the country but it takes a ridiculous down payment here to even get started. I don’t foresee myself taking this venture alone anytime soon, so it is easier to put it on the back-burner for now.
I am not particularly interested in purchasing shares in a bond fund that is tied to interest rates (especially given the current and foreseeable interest rate environment), but I would like to own individual bonds one day. I am not sure when I will look into this as it is likely way after the first 3 rungs are satisfied.
Am I missing any other types of income focused investment options?