I Think I Have A Better/FASTER Way To Financial Independence! Fact or Fallacy?

I’ll get right to the point:  I think there’s a better and faster way to grow passive income in order to achieve financial independence! We are committed dividend stock investors looking to build wealth through stock market investments. But I’ve been learning/studying for the past two years and implementing a new investment strategy the past nine months and the results are promising. Let me run this income producing investment strategy by you and help me figure out if this is sustainable or just a short term phenomenon that can’t be maintained to and through retirement from full time employment.

Path To Financial Freedom

We’re not much different from your average FI enthusiasts. My wife and I live below our means, have eliminated all debt except the home mortgage, have a six month emergency fund and invest aggressively, including in retirement and taxable accounts,  to develop long term wealth. We have set aside money for our last child’s college fund (two are already out of the house) and we invest in our Health Savings Account for current and future medical expenses. In terms of investments, we are deeply invested in dividend producing stocks and our account is equally dividend between stable, high dividend yield stocks and faster growing dividend growth stocks. Our stocks produce an average 2.8% annual dividend yield, growing about 11.5% annually. All in all, our stock portfolio has averaged a total annual return of 18% including dividends and appreciation over the past eight years. Everything mentioned so far is pretty straightforward and consistent with most FI practices.

Unknown-1

Also consistent with standard FI practices, my wife and I have been planning to develop wealth that is 33 times our expenses (assuming a 3% annual drawdown in retirement to be conservative). While we are well on our way to meet that goal, a new (to us) passive income path presented itself a couple years ago that I have studied and now implemented for the past nine months with incredible (to me) results. The results have been so good that we are re-thinking our FI goals, amounts and timeframes. In addition, the new (fairly) passive income stream seems to be sustainable into retirement.

Unknown-4

Conservative Options Trading As A Significant Passive Income Source

Hear me out. Monthly dividends are and have been a consistent income source. If we didn’t invest another dollar in the stock market and retired in a couple years from now, dividends would produce one third of our income needs in retirement. But its not enough to be safe as the rest of our financial needs would need to come from asset (stock) appreciation and sales. So two years ago we started studying option trading, focusing on a fairly conservative approach to produce additional monthly income. Then, nine months ago, we implemented the following monthly options trading plan:

Unknown

  • Each month, we sell out of the money (OTM) puts on premiere dividend and dividend growth stocks to produce immediate income and give us the chance to buy well researched, desired stocks at a discount. If the option expires OTM, then we keep the premium. If the stock price falls and the option is in the money (ITM) then we get the premium and we “get to” purchase a dividend producing stock on sale. Both are wins to us. (In general, we target to earn 1% or more on the monthly option premium each month and use an OTM strike price that is at least 5% lower than the stock price.)
  • Each month, after much research and analysis, sell OTM covered call options on the dividend stocks we own at strike prices that meet or exceed our researched sell price target. If the option expires out of the money, we keep the premium as income. If the strike price is met, we get the premium AND a nice profit from the sale of the stock. All proceeds from the sale of stock are then reinvested in more dividend producing stocks. (In general, we target to earn .5% or more on the monthly option premium each month and use an OTM strike price that is at least 10% higher than the current stock price.)

That’s it. Each option has a one month duration. If the option expires OTM, the money is then reinvested in options for the next month. Some call that “Stock Option Rinse and Repeat”.

The Results, So Far

Unknown-3

Thus far, the options trading income nearly quadruples the monthly dividend income. Take a look at these results:

  • We are averaging a monthly return of 1.79% (or over 21% annually) on the sale of put options. We have made over 250 put option trades in the nine months, with 236 expiring out of the money and 14 put options being assigned. We have purchased great dividend champion and dividend growth stocks on sale, such as ABBV, LOW, QCOM and CSCO.
  • We are averaging a monthly return of .99% (almost 12% annually) on the premiums of covered call options! We have made over 100 covered call option trades in the nine months, with 94 expiring out of the money and 6 call options being assigned. We have sold some great dividend stocks but got a large premium for the sale, at least 10% higher than our target sales price. Usually these sales result because of a higher than normal run up of the stock price. So our covered calls allow us to cash in profits on unusual spikes in price. Then all proceeds from the sales of stocks are reinvested into other dividend stocks. Sales have included stock in CSCO, STX, SBUX and ETP.

Summing up the performance of this income strategy over the past nine months we find that the total income return by adding the monthly option trading premiums to the monthly dividends equals 18.15% on our entire stock portfolio not including stock appreciation. (The stock appreciation during that timeframe was 19.1%) After taxes, fees and other costs, the net return on trading and dividends, or net income, was slightly over 12%.

 

The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness

So, Working Backwards, Doesn’t That Mean…

images-1

Let’s take that 12% net annual income return and reduce it by a small safety factor to 10% to be conservative. And let’s assume we do not want to spend any of the stock assets nor any of the stock appreciation. Just keep letting that build. Let’s also ignore social security and any other side income. Where does that leave us? I think that leaves us needing an investment base of 10 times expenses to meet our total retirement needs. Let’s take a look at some actual numbers to this situation: If we need $7,000/month to live comfortably in retirement, or $84,000 a year, doesn’t that mean we will need $840,000 of investable assets to produce that income ($840,000 X 10% = $84,000)?

But let’s continue to make the case more conservatively. Let’s assume that you trade options on only a portion of your investments, say only half of your investments. So, for option and dividend income to cover $84,000 in annual expenses, you would need roughly $1.2M of investable assets (This assumes dividends from all of the investments but options trading on only half of the investments).

images

The net result: I don’t think we necessarily need an investment account that is 33 times expenses to retire comfortably. I think with conservative options trading in conjunction with a stock portfolio of dividend and dividend growth stocks, that a couple could retire with an investment account that is only 15 times expenses.

Fact or fallacy ? Set me straight…

 

Now for something different: A look into the life of the most polarizing president of our time:


Understanding Trump

Kissing Frogs & The Pursuit Of Financial Freedom

 

It’s Been A Long Time

It seems like I have been really busy working on our family’s financial freedom since the start of the new year, but you can’t tell by the number of posts I have made (three). We have now officially completed one quarter of the new year and as I looked at my progress toward financial freedom, I see my blog post productivity going down, but seemingly my effort going up. What gives? So I took an inventory of what I have been doing. This is what I found: I made a lot of progress in finding side hustles and passive income. By that I mean I found what works and doesn’t work for me and my family for side hustles to help us meet my financial freedom goals. I want to share both our side hustle successes and failures to help others finds their path to financial freedom!

Unknown-11

Kissing Frogs

At the start of the new year I made it a goal to find side hustles that could grow our passive income or side income. I found some great ones that I can see my wife and I doing for the rest of our lives. But not before trying a whole bunch that just did not work out with our lifestyle and priorities! Like the fairy tale says: Sometimes you have to kiss a lot of frogs before you find your prince! We kissed a lot of frogs and found a couple princes.

Best personal finance book going! Click on the image for great DEALS!
The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness

Before we take a look at what works for us, let’s review the side hustles that I pursued that did not meet our goals. Note: This is not to say these side hustles are bad and you should never try these. These all worked to some degree over a three month period but were not what we were looking for. Take a look at what didn’t work for us: Our Frogs

Unknown-12

First, I tried to make money with the apps Ebates and Ibotta, getting rebates on household purchases but I found that our frugal lifestyle doesn’t gain much in the way of rebates. In fact, I found the opposite, I found the temptation strong to buy stuff I didn’t need in order to get the rebate (That’s probably the point). So I stopped those.

Second, I tried the apps, Swaybacks and Receipt Hog, where you scan and track your receipts and earn money doing so. But after three months I only made $10 bucks, so the payback was not there. What did I expect on only grocery store and gas station receipts?

Then I tried flexjobs.com doing data transcription, but that was a lot of work for just pennies an hour, literally. Not right, so I stopped.

As a budding photographer, I wanted to see if selling stock photography on iStockphoto.com could earn us some good money, but after 3 months I learned that I can only make about $2/hour selling my stock photography online. So it is not a good source of side income.

I learned a lot by trying these forms of side hustle, but they weren’t for me. The payback was too low and the impact on our lifestyle was too great to keep pursuing them. So I looked for other sources of side income, and found a couple that really worked, sort of:

images-6

Downsizing Pays Dividends

My family decided to downsize and de-clutter our home. We didn’t physically move, just simplified and changed our style to one of a clean, de-cluttered look. In the process of repainting, recarpeting and removing all the old knickknacks and decor, we developed a huge pile of stuff to get rid of! That pile was the “inventory” for a huge garage sale, quickly followed by online selling through Craigslist, Facebook and Ebay. The results were great! We sold almost everything, including old stereos, clothing, furniture, cameras, shoes, jewelry, toys, stuffed animals and anything else you can think of. It kind of stung at first, getting rid of all that stuff. Some of it sentimental. But once we got started we made over $1500! The good news is that we made good money for such a small amount of work. The bad news is, we ran out of stuff to sell! However, this selling spree did open the doors, and our eyes, for us to sell other stuff we find in our travels on Ebay and other online marketplaces. I would characterize this side hustle as a huge success but you need constant inventory to keep selling online. We would need to find a source if that were to become a regular part of our side hustle income stream.

images-4

From Frogs To Princes

One of our 2017 side hustle goals was to generate $2,500 a month in side hustle income. The online efforts listed above weren’t going to get us there and the reselling of stuff on Ebay helped a lot but would not be consistent because we ran out of inventory to sell. So the next thing we tried was dividend investing and options trading. Now these forms of side hustles are not for everyone, but I’m pretty sure they are perfect for us!

First, dividend investing. I have been an investor in stocks for a long time, but only recently adjusted my investing strategy to dividend investing. For many years I was simply a growth investor, investing in growing companies who, for the most part, reinvest all their earnings into the business. This type of investing had done well for us but it was not generating any side income. And the vicissitudes of the stock market were not letting me experience financial freedom. I was not free of worry and until I sold the stocks, there was no real profit. But dividend investing seems to be my thing! In November and December I researched everything I could about dividend investing and made a plan which I executed in January. I reorganized my investments to include many dividend champions and aristocrats that started paying dividends right away. For each of the last three months, our dividends have increased and the payback on the time invested to research and buy stocks is exceptional. Far better than the $2/hour I was getting woking on selling stock photography! Our goal of averaging $1000/month in dividends is well within reach and something I really enjoy.

A great source for everything about investing and building your financial future:    The Street

The other side hustle I really enjoy and have had some success with is options trading. Again, option trading is not for everyone, but it is for me, because I love the research and technical analysis. And with the help of some really smart mentors, I have come up with a simple and easy way to generate income, leveraging my stock investments that are already in place. My process is really pretty simple: Each weekend, do my homework and make a plan that I then execute the following week. The time commitments are not very taxing and so far, for the first three months of 2017, have been quite fruitful. So much so that I believe our $2,500/month in passive income is doable and sustainable.

Unknown-9

Lessons Learned From Kissing Frogs And Finding Princes

As you can see, I was really busy pursuing side hustles for financial freedom these last few months, but you can’t tell by the few blog posts I made, (now four). But the lesson learned is that it takes a while to find your financial freedom voice and pursuit. For us, financial freedom is in the form of frugal living, ample savings and some extra income through two side hustles: Dividend investing and options trading. It took us a long time, and a lot of effort to sift through a number of side hustle opportunities to find what works for us. And we are not done yet by any means. We will keep trying new things to build our passive income in pursuit of financial freedom. I hope I get back to sharing more financial freedom via this blog over time too. In the meantime, keep on hustling and never stop pursuing your financial freedom. It’s hard work but worth it!

Need help with your personal finances and don’t know where to start? Start here:

The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness

Two Years In The Life Of A Contrarian Dividend Investor

images-4

Two years ago I wrote a post called “A Contrarian’s Top Five Dividend Plays” that looked at investing in some out-of-favor stocks with great dividends and some long term stock appreciation upside, based on five large contrarian view (at the time) assumptions. As such, I purchased those five dividend producing stocks. Here,  I look at those stock purchases, the assumptions that got me there, and compare their actual performance to my expectations. Wise guy comments are in red! Revisions highlighted by strikethrough.

First, The Assumptions

On September 29, 2015, after a substantial late summer stock market correction that saw the Dow drop from 18,086 in late July, to 16,314 in late September (a 10% drop), I wrote that a person could make some money by investing in stocks that were beaten down by nervousness in the market at the time, but that had real long term potential if you could look past the current issues.

The five assumptions I based my buying decisions on were very clear in direction but a little bit vague in timing. I could do this because I was buying stocks for the long term, so specificity was not necessarily needed for my stock picks to generate value. Here are those assumptions and how each faired over the past year:

  • The oil industry in America will eventually recover
    • $49 a barrel late September 2015, $50 now but went to $28 in between
    • Boy, how little things have changed. Still $50 a barrel
  • Interest rates will eventually go up
    • Only one small rate hike in December 2015 but no real direction yet
    • I still believe this and they have somewhat, but slower than expected!
  • Health care demand will continue to grow
    • Yes, but strong political headwinds on pricing in past year
    • Still YES, but still headwinds
  • Real estate, over time, will continue to grow in value
    • This is true. Prices up a full 14-20% where I live: Austin Texas
    • Commercial and residential building has intensified, thus more demand for power, supplies and construction labor
    • The ONLY assumption that has held completely true!
  • Autos will continue set sales records due to the pent up demand since 2008
    • 2015 was a record year and 2016 will be close but perception is we have peaked
    • We have peaked and some trouble ahead with loan defaults and incentives going up!

By my own admission, most of my assumptions have not really played out…yet. Only real estate appreciation has really been dependable. All the other assumptions have either not yet been realized or are perceived as gone by (auto sales).

In the long term, however, I stand by my assumptions. I think oil will continue to go up over time. I originally said the price would go up within 18 months and I might have been a little hasty. But with consumption going up around the world, I think prices will eventually go up and stay up.

I also think interest rates will eventually go up. June 2017 seems to be the likely target for the next interest rate hike. I don’t know when they will go up but I am sure they will eventually. As for health care demand, I think this will stay tepid until after the presidential elections but the fact is, Americans are getting older and need more medicine. Last, auto demand may have  has peaked, but the simple fact is that the average car on the road is over 11 years, so I think demand will stay high for years to come. Also, I think auto makers are better prepared for the eventually demand downturn. Both Ford and General Motors have said they can be profitable at 75% of current demand.

The Contrarian Dividend Stocks

Unknown-13

The five stocks that I picked each lined up with my assumptions mentioned above. Let’s see how they have performed since my purchase one year ago:

Stock             Purchase Price      Current Price     Current Dividend     Dividend % Change

KMI                $29.41                       $20.43                   $.50                              -65%

MPW              $11.55                       $12.81                   $.96                              +5%

GM                  $29.40                      $33.55                    $1.52                             +10%

WFC                $51.40                      $54.60                   $1.52                              +5%

SO                    $43.41                      $49.58                    $2.32                             +5%

Let’s face it, my stocks did not perform well. The only stocks that did well, SO, did so because the underlying assumption did well (real estate/power demand would appreciate/increase). All the other stock picks were based on assumptions that have not come true yet. But I am not discouraged! I still believe my assumptions will come through and my stocks will, eventually, perform well. In the meantime, I will continue to accumulate shares of each to build a better base. In the meantime, I am collecting $725/year in dividends. Essentially being paid to wait.

Going Forward – The Upside

Unknown-14

Because I still believe my five assumptions will eventually come true, I am expecting both dividend growth and stock price appreciation with my five stocks. In order, I believe:

  • KMI will increase its dividend as oil prices return to historical prices and as more and more of their capital investments start making profits, especially in natural gas.
  • MPW will continue to increase dividends as their medical facilities accumulate.
  • GM will increase profits and dividends as their trucks and SUV’s, their most profitable products, increase in sales.
  • WFC will increase profits and dividends with the increase in interest rates.
  • SO will continue to increase profits and dividends with continued power demand.

Here’s another view of my stock picks and their potential:

Stock            Dividend Yield          Payout Ratio           

KMI                2.44%                          80% of free cash

MPW              7.40%                          88% of free cash

GM                 4.58%                          25%

WFC               2.79%                          38%

SO                   4.69%                         88%

I think WFC and GM have a lot of room to increase dividends for the foreseeable future. I think KMI needs oil prices to recover to increase dividends back to its previous levels but I don’t think that is out of the question. MPW and SO will continue to grow dividends slowly and pay out 7% and 4.7% respectively.

In The End…

My 18 month estimate for my market/business assumptions to play out was too aggressive, its been 24 months and it still is no where near playing out, but I still hold that they will eventually come true. In the meantime, I am being paid over $700/year to wait for that to happen. In fact, I am still accumulating more of each of these shares to build a larger base. My goal is to build up the base that by 2020 I am receiving $250/month in dividends from these five stocks, with the potential to increase 4-6% each year thereafter.

 

A trusted source for investing information for your financial future: The Street

 

What do you think of my contrarian dividend investment plan?

Unknown-15

Need help investing as part of your goal of financial freedom? Start here:


The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness

Parents, Get A Cup And Wake Up! Top 5 Financial Actions To Take Right Now!!!

IMG_1973

Parents: Is It Too Late?

I frequently hear parents tell me it is too late for them to start working towards their financial dreams for their families. And I say, parents, get a cup and wake up! It is not too late and the sooner you start taking action the sooner your goals can be reached. The fact is, time is most beneficial the sooner you start.

Top 5 Financial Actions For Parents To Start Right Now

1. College Savings Plan. Did you know a four year degree can largely be financed by putting just $75/month away in a 529 Plan from the time of your child’s birth? Eighteen years, later you have the college fund. Most of us can find $75/month, all it takes is an early start to saving money.

2. Planning a special wedding for your baby girl? Why not start a Wedding Savings Fund with $25/month from birth and watch the compound interest accumulate!

3. Planning to leave a legacy for your children? Why not get some Term Life Insurance that not only covers the family in a time of need and/or can be the basis of the generational wealth you plan to pass on?

4. Want to be a good example to your kids? Of course. So right now, exemplify responsibility by Making A Budget and living within your means. Remember, kids learn much more by watching our actions than listening to our words. A budget shows our kids discipline and responsibility.

5. Sounds funny, but one of the best things you can starting doing for your kids right now is Saving For Your Retirement. I don’t mean for the kid’s retirement. I mean for your retirement so that your kids do not have to worry about supporting you in your latter years.

Continuing the coffee metaphor, start these simple actions early, when the children are being born, and let them brew, (compound and accumulate), into sizable accounts that are ready when you need them. Getting started later in life? It is harder but it still makes sense to start these actions. With the price of raising children rising faster than most family incomes, the power of compound interest over time can help overcome the expected future expenses and allow you to realize your family’s future dreams!

 

Need more help with your personal finance? Start Here. Order now and SAVE!

The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness

A Contrarian’s Top Five Dividend Plays

images-1

In this crazy stock market with extreme volatility and sensitivity, I re-examined my income producing stock strategy and realized there may be a different approach to earning great dividends while waiting for good companies to recover some value in great industries. Let’s take a look. First, let’s look at some assumptions. This is what I came up with:

  1. The oil industry in America will eventually recover
  2. Interest rates will eventually go up
  3. Health care demand will continue to grow
  4. Real estate, over time, will continue to grow in value
  5. Autos will continue set sales records due to the pent up demand since 2008

Given this scenario, I purchased these five dividend producing stocks. Here I list what I bought, why I bought it and the expected return, both in terms of dividends and long term value.

Stock # 1: Kinder Morgan, KMI, $29.40/share, 6.7% Dividend Yield. I expect the price of oil, natural gas and CO2 to normalize over the next 18 months, which could bring the price per share back into the $40/share range for a 30% upside.

Stock #2: Medical Properties Inc, REIT, MPW, $11.55/share, 7.7% Dividend Yield. I expect health care and the need for hospitals to be in increasing demand, in America and abroad. Yes, interest rates raising may put negative pressure on the stock but a 35% forecasted growth rate in assets could bring a stock price upside of 25%.

Stock #3: General Motors, GM, $29.40/share, 4.9% Dividend Yield. With the pent up demand for autos, the currently low oil prices, and GM’s strong position in high margin SUV’s and trucks, I expect GM to return to historical PE levels (10.8) which gives the stock a 48% upside.

Stock #4: Southern Co, SO, $29/share, 4.99% Dividend Yield. With the recent conversions to natural gas and looming interest rate hikes, this stock has upside of 5-7% annually.

Stock #5: Wells Fargo, WFC, $51.40/share, 2.87% Dividend Yield. With interest rate increases expected, this stock could return to its historical PE ratio (16.2) which gives the stock a potential 32% upside.

There you have it. It is a portfolio that returns an average 5.5% dividend yield and a significant stock share price upside if you believe the assumptions listed above and have the time to wait for each catalyst to materialize.

What do you think?