What’s Under the Hood: Measuring Your Money’s Horsepower
- Kelly Green
- Dividend Digest
- March 8, 2023
Two investors are talking about their investments.
Both are pleased with the income they’ve collected over the past year.
The first investor brags that he pocketed an extra $16,500 in dividends.
After hearing his friend’s cash windfall, the second investor starts to feel cheated by the $7,500 in dividends he collected.
Your dividend income dollar amount is only half the story.
To make a fair comparison between these two investors, we need more information. How much did each have invested?
Investor #1 has $1 million dollars invested. Investor #2 has $100,000 invested.
Who made the better income investment?
To find out, all we have to do is calculate each investor’s yield. Here’s the math:
Yield % = (Income Collected / Amount Invested) x 100
This is the formula used to figure the dividend yield on individual companies. And you can use it to figure the yield on your entire income portfolio.
Let’s see the yield earned by our two investors above:
(16,500/1,000,000) x 100 = 1.65% yield
(7,500/100,000) x 100 = 7.5% yield
Yield is a great way to measure your money’s horsepower. The more you have, the harder it’s working for you. We can clearly see that investor #2 has his money working very hard.
Strive to Be Above Average
Our motto at Yield Shark is: You deserve to collect “interest” on your invested money.
I’m not talking about the pittance paid on your savings account or a 3% CD. You deserve above average yield.
Investor #1 collected an average yield of just 1.65%.
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There are some great, stable companies in the index, but many of them pay yields too low to make it on my radar.
Investor #2 collected a yield equal to the average current yield of my Yield Shark stocks with a “buy” recommendation.
I believe you deserve to earn a minimum of 3% on your investments. And the average yield of my Yield Shark buy positions is more than double that at 7.5%.
It all comes down to yield versus dollars.
Opportunities to collect above-average yields—often way above average—exist if you know where to look.
Obviously, you don’t simply buy stocks with humongous yields. You look at companies on a case-by-case basis. And there are some company traits that will help guide you along your selection process.
“Alphabet Soup” of Required Dividends
BDCs, REITs, and MLPs are great places to look for above-average dividend yields. I jokingly call them the alphabet soup stocks.
What the heck are they?
A BDC (business development company) allows an individual investor to invest in private companies and smaller public companies.
BDCs provide capital and managerial assistance to smaller companies. These are companies that are hard for individual investors to access. Buying the stock of a BDC opens the door to investing in a basket of curated businesses.
A REIT (real estate investment trust) grants individual investors access to large real estate portfolios.
Each REIT is unique, with a strategy for investing in different types of real estate. To qualify as a REIT, a company must derive at least 75% of its gross income from real estate–related activities. There are over 255 REITs that trade on the major US exchanges.
An MLP (master limited partnership) focuses on natural resource–related activities, including oil, gas, coal, timber, and certain methods of transporting commodities.
All three of these structures require the company to pay out the majority of its taxable income to its shareholders. In exchange, it receives tax advantages.
So don’t be surprised if you see variable dividend payouts among these companies and high payout ratios. That is by design.
Dividend Royalty Status Signals Stability
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Dividend Aristocrat. Must be a member of the S&P 500 and have increased its dividend every year for the past 25 consecutive years.
There are only 67 companies that meet this requirement right now. A small group of them pay above-average yields and might make for a good addition to your income portfolio.
Dividend King. Any company that has raised its dividend every year for the past 50 consecutive years.
Without the requirement of S&P 500 membership, more companies become potentially eligible for the Dividend King title. Still, only 46 qualify.
When looking for income, these two groups of companies are a great place to start.
Again, being dividend royalty or an “alphabet soup” stock is not sufficient evidence to add it to your portfolio. Each company requires different levels of scrutiny.
If you want my favorite recommendations, I just put together two new reports for my Yield Shark readers.
The Second Income Blueprint shows 5 of my favorite “alphabet soup” stocks that can help you lock in above-average current yield throughout 2023.
The Definitive Guide to Generational Wealth adds my top three Dividend Aristocrats that you could hold for years to exponentially grow your wealth.
If you’re already a subscriber, you can find them in the Special Reports section of the members-only area of the website.
If not, you can join the 2023 Second Income Challenge here for instant access.
For more income, now and in the future,