The Myth of Multiple Income Streams …

For a while now the web has been a’twitter with ebooks spouting the idea of Multiple Income Streams …

… literally, here is an example from Twitter:

Multiple Income Streams is the ONLY way to Achieve Extreme Wealth …

I’m not so sure that was true for me – hence it can’t be ONLY

But, is it true even if we substitute ‘usually’ for ‘only’?

Again, I don’t think so … in fact, I feel that most people achieve a very high level of INCOME from just one of their ‘multiple streams of income’ (that is, even if they have more than one) … for me, it was very much an 80/20 thing:

- One of my businesses produced $1 million a year EBITDA (earnings before bullsh*t),

- The other produced $200k a year (still does).

Now, for those who are astute, you will see that I twisted the original statement from ‘wealth’ to ‘income’ … and, as we all know by now:

Income [does not equal] Wealth

So, this is what I think: you don’t necessarily need multiple streams of income, but you DO need a place to store the income earned – and, it’s the wealth that “passively” builds up there that creates the true wealth (at least, it did for me i.e. my businesses fueled my property investments, and THAT’S what took me to my first $7 million) – and that more equates to my Perpetual Money Machine concept than it does to the usually espoused Multiple Income Streams Fallacy … they may seem the same, but they are very different:

Build your Perpetual Money Machine and prosper!

The Myth of Passive Income …

Flexo at Consumerism Commentary says that the Wikipedia entry on “passive income” is WRONG.

Flexo is right!

Wikipedia says:

Passive income is a rent received on a regular basis, with little effort required to maintain it.

OK, that’s pretty obviously incorrect, so let’s adjust this slightly to say: “Passive income is any income received on a regular basis, with little effort required to maintain it”.

Better?

Yep! It does sound a little better – aside from the repetitive tautology – so, let’s see a little more of the Wikipedia entry:

Some examples of passive income are:

• Earnings from a business that does not require direct involvement from the owner or merchant;
• Rental from property;
• Royalties from publishing a book or from licensing a patent or other form of intellectual property;
• Earnings from internet advertisements on websites;
• Residual income, repeated regular income earned by a sales person, generated from the payment of a product or service, that must be renewed on a regular basis in order to continue receiving its benefits;
• Dividend and interest income from owning securities, such as stocks and bonds, is usually referred to as portfolio income, which may or may not be considered a form of passive income. In the United States, portfolio income is considered a different type of income than passive income;
• Pensions.^{[dubious – discuss]}

I love the little ^{[dubious – discuss]} attached to the last one …

… it should be attached to all of them!

You see, whilst I have also been guilty of (mis)using the term “passive income”, at least I know fantasy from reality; let’s start by reexamining the Wikipedia list:

1. Earnings from a business that does not require direct involvement from the owner or merchant;

Q: If you put the owner of such a business in one corner of a room with Santa Claus, The Easter Bunny, and the Tooth Fairy sitting in the other three corners, and you put a bucket of gold in the middle, who would be the first to get to the gold?

A: No one, because there is NO SUCH THING as Santa Claus, The Easter Bunny, the Tooth Fairy … or, a business that does not require direct involvement from the owner!

2. Rental from property;

This is great, especially if you have (i) a flawless property manager, and (ii) NO taxes, vacancies, repairs, maintenance, mortgage payments, refinancings, etc., etc.

3. Royalties from publishing a book or from licensing a patent or other form of intellectual property;

Agree; totally ‘passive’ … that is, AFTER the book writing, editing, deadlines, interviews, and book signings … and, BEFORE the next book writing, editing, deadlines, interviews, and book signings.

4. Earnings from internet advertisements on websites;

Please! Exactly HOW do you ‘passively attract’ readers to your site to get the ‘earnings from internet advertisements on websites’?!

5. Residual income, repeated regular income earned by a sales person, generated from the payment of a product or service, that must be renewed on a regular basis in order to continue receiving its benefits;

Asked: “Residual income, repeated regular income earned by a sales person, generated from the payment of a product or service”
And, Answered: “that must be renewed on a regular basis in order to continue receiving its benefits” … we addressed this exact issue for (another) Scott, not so long ago!

6. Dividend and interest income from owning securities, such as stocks and bonds, is usually referred to as portfolio income, which may or may not be considered a form of passive income. In the United States, portfolio income is considered a different type of income than passive income;

Now, this is interesting – if it is indeed true that in “the United States, portfolio income is considered a different type of income than passive income” – because (at least, to me), dividend and interest income is one of the MOST PASSIVE of all of the items on this list … interest rate changes, market crashes, poor earnings reports, and other reasons that a Board may reduce or eliminate the dividend, aside.

7. Pensions.

Strange that whomever reviewed this entry felt this one to be ‘dubious’ … ‘old style’ pensions (like government ‘lifetime pensions’, and the ones that are sending the car companies broke) seem to be the most passive of all of these!

If you disagree, please drop me a comment (below) then try and go on an extended vacation and NOT: (a) answer your cell phone, or (b) check your e-mails, or (c) worry about your [insert "passive income" source of choice]

It's all about the curve – Part II

Nobody wants their finances to grow in a straight line (too slow, and inflation really hurts), so let’s continue this series with a look at a faster way to grow your money … one that is well covered in mainstream personal finance blogs:

The Compound Curve

When we do one simple thing [AJC: again, ignoring the effects of inflation], the whole picture changes dramatically:

If, instead of withdrawing/spending the interest earned on the CD, we ask the bank to reinvest the interest then we create an effect known as compounding. Where both the principle (i.e. the lump sum that you originally deposited) and the interest (then the interest on the interest and so on …) earn interest. The effect, as you can see, can be quite powerful … slow, but powerful.

In fact, ‘urban legend’ has Albert Einstein calling compounding “the most powerful force in the Universe” … urban legend because Einstein would never have called such a relatively [pun intended] slow geometric progression ‘powerful’ when he had nuclear reactivity to play with (a far quicker and more dramatic form of compounding).

Be that as it may, compounding is something well understood, but always remember that it is only powerful to the extent that it may keep you out of the ‘poor house’ – but, not by much – hence, compounding is really only a basic (but necessary!) Making Money 101 saving strategy:

- without it, you don’t get to first base, financially-speaking, but

- with it, that’s about all you do.

You can – and probably already do, to a greater or lesser degree – apply the power of compounding to your job/profession (be it as paid employee or paid consultant) when you reinvest some of your earnings into investments such as mutual funds (e.g. via your 401k), direct stocks, and real-estate … and, of course, reinvest (instead of withdraw and spend) the dividends (a.ka.a ‘profits’) from those investments.

We're not there yet, but …

… who knows?

Inflation may just rear its ugly head, as Modern Gal suggests:

My bet is that the long-term successful investors (like Warren Buffet) see the next big cyclical turn as being the threat of global inflation.  And by this, I mean not inflation as in 3-4%, but I mean a change in cycle to having structurally higher inflation for a number of years.  While nominal wages have (mostly) risen, real wages have not kept up with inflation for many workers.  This is the problem called the money illusion.  In other words, because your paychecks are growing larger over time, you think that you think of this as a raise or cost of living increase.  In fact, if the cost of living outpaces your raises, you have in effect gotten poorer, or your salary has lost real value.

I don’t normally talk about things that you can’t do today – and, the things that I do talk about often need to be adjusted for which part of the Making Money Cycle you are in – but, I will make a couple of suggestions and you can bookmark this post in case inflation does hit before I get a chance to write a follow up post

Firstly, what is high inflation?

To me, ‘high’ and ‘low’ are pretty meaningless terms in an inflationary context, but Modern gal suggests “let’s say inflation crept up to 5% a year … not many people are expecting a shift to a very high inflation rate, like 10%.”, which seems like a pretty reasonable range to work with, if you ask me.

Modern Gal then suggests that inflation-adjusted securities such as TIPS are sensible high-inflation strategies …

… but, here is what I think, IF you think inflation is heading up and you are in this stage of the Making Money Cycle:

Making Money 101

No great change here; get your spending under control; avoid consumer debt (although, strangely enough, it’s actually slightly BETTER for you if inflation rises AFTER you accrue the debt because your payments stay fixed – unless interest rates also rise – but, your income rises due to ‘cost of living increases’); and save money … but, if this is all you do, that inflation will eat up a lot of the benefit; as Modern Gal says:

Let’s say you have $100,000 in savings today, but you want to hold off spending until retirement.  If you decide to put your savings under a mattress (meaning you earned zero interest or dividends), in 25 years time, at a 3% inflation rate, your $100k would be the equivalent of about $48k in the future.  But let’s say inflation crept up to 5% a year, a rate that was not unusual a decade ago. Under this scenario, your $100k should be thought of as less than $30k in 25 years time.  And, if we end up with double digit inflation at 10%, the 100k adjusted for buying power in today’s dollars looks like a measly $9230.

The key Making Money 101 change (although, this is a strategy that I also recommend in the current low inflation / low interest rate environment) is to lock in your interest rate on your own home, ideally before the high inflation (which can often trigger higher interest rates) kicks in.

Making Money 201

Here, we want to take advantage of inflation which tends to push the prices of things up: the higher the rate of inflation, the more prices go up …

… so, the trick is to buy something that will rise in price with (or over) inflation BUT pay for it in current-day dollars.

What can do THAT???

Well, real-estate can, particularly in the USA where you can leverage an unusual quirk of the lending industry: you see, you can buy real-estate that will go up in value as surely as your can spell I N F L A T I O N …

… and, you can buy it with the Bank’s money and lock that ‘price’ in for up to 30 years (on some residential property).

So, that $535 payment (at 5.75% fixed interest for 30 years) STAYS at $535 even as the $100,000 property doubles in value to $200,000 over time … and, the higher the inflation rate, the quicker the property doubles … no matter what happens, your payments stay the same.

Obviously, if spending $535 p.m. was ‘good value’ when the property was $100k, it must be twice as good value when the property reaches $200k!

So, if you know that high inflation is increasing your property portfolio more rapidly, why wouldn’t you buy as much as you can get your hands on if:

a) Current interest rates seems low, and

b) If you felt that a period of higher inflation was coming?

Making Money 301

We are obviously not looking to acquire more debt, here, but there’s no reason to pay off debt either IF:

1. The interest rate has been locked in at levels lower than current interest rates, and

2. You can’t put the money to work for you in ‘safe’ investments elsewhere, and

3. The properties produce enough ‘spare’ (after mortgage interest, costs, and provisions against future vacancies and repairs/maintenance) cash-flow to satisfy your daily needs.

If the property meets these criteria then it’s probably reasonable to assume that your income (i.e. rents) will keep pace with inflation, as probably will your capital (i.e. the building itself).

Of course, if you haven’t already bought the property by the time that you stop work [AJC: a MUCH better word than 'retire' for us 49-years-young-stopper-workerers ], then I would advise that you look at these alternatives:

i) Real-estate (this time, bought with very high deposit / very low borrowings … if any), and/or

ii) TIPS – Treasury Inflation Protected Securities … although, you will have ideally bought these while inflation was still low(er) as competition for these may have pushed prices up / yields down, and/or

iii) Dare I say it: dividend stocks (or, any portfolio of stocks that you are happy to sell down a portion of each year to create your own ‘dividend’

…. but, avoid cash, or cash-equivalents (CD’s, non-inflation-protected bonds, etc.) as inflation will almost literally gobble these up!

Three … well, four questions to ask when picking a financial adviser …

I love those articles that the mainstream financial press likes to trot out from time to time, such as this Wall Street Journal piece that offers Seven Questions to Ask When Picking a Financial Adviser; you will have to read the article for the full story (literally!) but here is their list:

1. What’s in the adviser’s background?
2. What do the adviser’s clients say?
3. How does the adviser get paid?
4. Where are the adviser’s checks and balances?
5. What’s the adviser’s track record?
6. Can the adviser put it in writing?
7. What do other pros think?

Personally I could care less how an adviser gets paid (as long as I know up front) and whether they can write or not … and, I certainly don’t care what the their clients or peers think, because I am always looking for above-the-herd results. And, track records and supposed checks and balances mean nothing when there is a long line of Madoff-wannabes in this world (so, I ain’t handing over the keys to my check account to anybody!) …

… I only want to know three (actually, four) things:

1. How much is the ‘adviser’ worth today?

I only want to take advice [AJC: commercial, money-making advice ... not 'technical' advice such as tax codes, appropriate legal entities, contract wording, etc.] from people who are already well ahead of me. When I start to catch up to my adviser’s net worth, it’s time to find a new adviser!

2. What does the adviser invest in?

I only want to take advice [AJC: yadda yadda, yadda ... as above] from somebody who has made the bulk of their current net worth in exactly what they are advising me to invest in.

3. Will her advice get me to my Number?

Can the adviser then show me – in a way that I can understand (no smokes and mirrors) – exactly how what she invested in to get to her current net worth will get me to my Number by my Date [AJC: apply this reasonableness test to the investment mix that she is recommending]?

Then there’s a fourth question, but it’s for me to answer, not her:

4. Is it something that I love, understand, and feel comfortable doing?

Because, once the adviser has finished dispensing her advice, and you have handed over your money for her fees/commissions, despite what anybody may tell you to the contrary, it’s all up to you!

15 seconds to say what took me three posts …

Scroll to about the 3.5 minute mark and listen for 30 seconds: that’s all it takes Warren Buffett to tell you what I’ve been trying to tell you in post-after-post about the folly of buying so-called ‘dividend stocks’ …

… why is he so quick?

First of all, Warren Buffett has credibility; secondly, he has a knack for summarizing things very neatly.

Now, Warren didn’t teach me how to think about dividends – to me, it’s just such clear common sense I can’t even understand the “pro-dividend for dividend’s sake lobby” – but, it’s nice to see that “The World’s Greatest Investor” puts his shareholders’ money where his mouth is

Building a better retirement account …

If I say “retirement account” what do you say?

“401k”?

Or, is there a better way …

MoneyMonk thinks that there may be, but only once you’re a millionaire:

I’ll turn this over to Scott, who addresses both of these issues very nicely:

No matter how much tax you pay next year, Scott, by investing in income-producing, appreciating assets – and, holding for the long-term in the right types of structures (trusts or companies) – I have absolutely no doubt that you will (a) pay less tax and, (b) return more than the average Doctor on the same salary who doesn’t …

… and, since you are one of the 7 Millionaires … In Training! I will show you exactly how to do it … and, anybody who wants to be a fly on the wall (better yet, participate in the open discussion) will be able to learn some valuable lessons, as well.

And, you can take that to the piggy-bank!

Feel the power, Baby!

We all know one …

… you know, (usually) the guy who goes out and buys the biggest ‘muscle car’ that he can afford.

His # 1 criteria is the Number of Horses that fit under the hood of the car.

Unfortunately, those cars usually can’t get to/from the corner store as quickly as Little Johnny on his BMX bike (traffic and traffic lights), and they certainly can’t get around the track quicker than that guy from school who was always tinkering with engines and stuff … you know, Tony Romularo in his souped up 80′s bright red Alfa Sud, you know, that little Italian car with the tricked up suspension?!

You see, the muscle car has a a problem: weight.

In order to carry the engine … and, have the BIG/POWERFUL car look that muscle-car-lovers crave … these cars usually have to be big and heavy. That means that they can be slower than the simple measure of horsepower can lead you to believe.

So, you can do what others do … look for results: look at the specs, skim right past the power rating, and go straight to the only kind of performance that really matters – the one that takes into account BOTH Power AND Weight: how fast will the car do the 0 to 60 mph?

That’s the kind of results that I’m after … if it’s under 5.5 seconds, I’m there, Baby!

But, are you?

How do you explain Little Johnny and the trip to the shops? Or Tony and his ‘tricked up’ Alfa?

Of course you can’t unless you take a look at your overall objective first:

- If you want the most powerful car that you can buy, go ahead and buy the Muscle Car (after all, it looks good, sounds great, and you’ll be a hit with your mates at the pub), but

- If you want to get from A to B in the [Insert criteria of choice: fastest time possible, safest means possible, greenest way possible, lowest cost way possible ... or, any specific combination thereof] then you have a more complex decision to make that may or may not include buying the biggest engine you can find.

Do you see where this is going?

There are so many financial ‘truths’ out there:

- Buy dividend stocks

- Max your 401k

- Choose only the most ‘tax advantaged’ real-estate

- and, there are many, many more

Each, in its own way, is like just one aspect of a [financial] vehicle: one is like the engine, another like the suspension, and another like the type of fuel you put into it …

… you COULD take on any of these just because it’s there; after all, millions do.

But, wouldn’t it be smarter to first look at your financial destination (your Number), the time that you have available to get there (your Date), and the skills/knowledge/interest/aptitude that you can apply, then look at the range of ‘vehicles’ (i.e. your Growth Engines) available to get you there and select only the most appropriate for you?

I like to think so …

So, how did my wife choose her current car?

She wanted a luxury, SUV Hybrid … that meant the Lexus R400h. Period.

Does it even save money (no … too damned expensive)? Does it even save the environment (uses as much fuel as the non-hybrid R300; and, what happens with the batteries once they need to be disposed of)? And, is it even a good SUV or a real ‘luxury’ vehicle (doesn’t even have keyless entry)?

And, how did I choose my current car:

- Performance: 0 – 60 sub 5 seconds

- Convenience: 4 ‘real’ seats to carry the kids in the back

- Handling: Had to be ‘nifty’ around a track

- Safety: Had to have a high safety rating; good crash test results; airbags and other safety features

- Convertible: Had to have a metal-folding roof

But, even those are merely a list of features: I wanted a car that I could use all year around (be a true convertible in summer; a true coupe in winter … and able to flip/flop between the two at the drop of a hat); be a lot of fun (but safe), and be fast’n'fun – and safe – both on the road and on the track.

That pretty much meant the BMW M3 … fortunately, price tag (and, fuel consumption) was never on my list of criteria or I may have been ‘forced’ to go for the VW EOS

The 401k fallacy …

The objective of this blog is not to challenge your thinking on so-called ‘investment truths’ or ‘common investment wisdom’ …

… that’s just a means to an end.

The objective is to help you become rich [AJC: after all the title of this blog IS "How to make $7 Million in 7 Years"], but in doing so we MUST challenge your thinking on so-called ‘investment truths’ or ‘common investment wisdom’!

Do you see how one is the means and the other is the end?

So it is with many of these personal finance ‘myths’ … so many are treated as an end in themselves, rather than the means that they simply are; none more so than the Mighty 401k.

If we are to become rich, we must slay the temptation to lay at the feet of this great Financial Idol and see it not for what it promises (future financial freedom) but for what it really is: simply words written on a piece of paper.

That’s it, the 401k is just a tax-advantaged savings TOOL … it’s not even a scheme, as there is NO guidance as to what you should put in it (other than restrictions to tell you what you MUST NOT put in it).

Therefore, I have NO OPINION on whether a 401k is intrinsically good or bad for YOU … just as I have no opinion as to whether a stone carving is intrinsically good or bad for a pagan civilization … it’s what belief in its purported ‘power’ does for (or against) your [financial] future that concerns me.

It’s not the tool, but how you choose to use it that counts …

Now, I covered the 401k in many posts, but I thought that I would pick up on a great discussion going on over at my other site, where Scott says that he has no use for a 401k:

I can’t utilize many of the retirement accounts because of my income level and the ones that I can, I max so quickly that it just seems moot. For example, right now, I’m saving up cash as fast as I can to purchase the entire building that my practice is located in. This building also has another business next door that will be paying me rent, and in essence, will drop my personal mortgage significantly, while it’s getting paid off in a few short years, then I own the commercial building, not pay rent, AND receive passive income!

So my question to you would be; Should I delay the purchase date to buy this building and all the above said benefits to first max out retirement accounts that I can’t touch for 30+ years, AND get taxed on them when I do.

Which gets me to my Number faster? Purchasing commercial real estate NOW as fast as I can in my 30’s, particularly one’s that I would normally have to pay rent on and actually begin RECEIVING rent on as well, or fund a retirement account to shed some tax now?

After a bit of discussion around the possibility of finding other tax-advantaged investment vehicles, depending upon your financial positions, Jeff summarized the discussion quite soundly:

The only reasons I can come up with right now to not invest in these types of accounts first is either:

1. The amount you want to invest is greater than the annual contribution limits.

Or

2. You don’t like the age restrictions and early withdrawal penalties that go along with these accounts.

Those are both very valid concerns and certainly reasons to not use typical retirement accounts.

Absolutely, Jeff!

If you can achieve your investment goals, at the same time taking advantage of the legitimate tax-shelters available to you (e.g. 401k, self-directed IRA, etc.), then you would be a fool not to do so.

However, if you divert from a financial course that stands a reasonable chance of meeting your financial objectives – the type of course that Scott seems set to take – just so that you can take part in, say, an employer-sponsored 401k, that may not achieve your financial objectives (in the timeframe that you require, not the timeframe that the employer/government offers) then, in my opinion, you are making a huge mistake

The fallacy of dividend paying stocks – Part III

Today, in a final post in a long series, I show you how to put what you have learned about dividends into inaction

But, to wrap up this important series, first it might be nice to go “all the way way to the beginning” with some history on dividends, courtesy of our friends over at Everything Warren Buffett:

During the first half of the 20th century, dividend income made up all of the 5.3 percent return U.S. stocks delivered to investors, data compiled by the London Business School show.

At the time, companies paid out most of their earnings to shareholders, compelled by a Treasury Department rule that established penalties for “improper accumulation” of income, according to the sixth edition of Benjamin Graham and David L. Dodd’s “Security Analysis.” The book laid out the principles of value investing followed by billionaire Warren Buffett, the chief executive officer of Berkshire Hathaway Inc. and the world’s most successful investor.

“The prime purpose of a business corporation is to pay dividends to its owners,” Graham and Dodd wrote.

Between 1980 and 2000, investors increasingly sought price gains as dividends contributed 25 percent of returns. The shift occurred as companies such as Cisco Systems Inc. and WorldCom Inc. increased profits by using excess cash for expansion and acquisitions. In the five-year bull market that ended in 2007, cash to shareholders as a percentage of earnings fell to a record low of 31 percent, based on data compiled by Yale University professor Robert Shiller, as profit growth juiced by borrowed money outstripped dividend increases.

Returning money to shareholders prevents managers from wasting it on investments that may not prove profitable, according to Bahl & Gaynor’s McCormick.

“It forces companies from empire building, stupid acquisitions and nefarious activities,” he said. “You can’t fake the cash.”

The last sentence pretty much summarizes the pro-dividend position: it stops companies from making mistakes with their cash …

… but, my perspective on that is simple: who is better placed to invest my cash? Me (Mr Ordinary Investor) or, say, Warren Buffett (Mr World’s Richest Man)?

In fact, at the 2000 Berkshire Hathaway Annual General Meeting, Warren Buffett was asked about the dividend policy at Berkshire, to which he said:

We will either pay large dividends or none at all if we can’t obtain more money through re-investment (of those funds). There is no logic to regularly paying out 10% or 20% of earnings as dividends every year.

Given my somewhat ambivalent stance on dividends – I can take ‘em or leave ‘em – it was interesting to see this recent and nicely coincidental article in Motley Fool:

… it’s important not to focus on a dividend yield alone, as recent happenings in the stocks below make clear:

Company	Problem With Dividend
General Electric	Either must cut dividend or lose AAA rating, according to analysts.
Gramercy Capital	Company forwent its fourth quarter dividend.
Education Realty Trust of Memphis	Cut its dividend in half.

Even in a bear market, growing companies that pay dividends can be too good to be true — so be sure to do your research.

You see, the decision to pay dividends is a somewhat arbitrary decision of the board of directors … only loosely tied to the actual profit (better yet, cash flow) performance of the underlying business.

Profits are related to the internal performance of the business.

Dividends are related to the external relationship of the company’s management (as represented by it’s board of directors) to its owners (i.e. its shareholders).

So, when you invest in stocks, you should simply remember that you are buying a small share of a big business: and like any other investment, you should make sure that it makes a decent – and, steadily increasing – profit (called ‘earnings’) and produces strong – and, increasing – cashflows that management uses wisely.

This means that you will EVENTUALLY get your money back in some combination of two ways:

1. The share price will eventually rise to reflect increases in profits and/or

2. The board of directors may choose to distribute some of the profits as dividends.

So here are your Buy For Income INVESTING strategies if you do decide to choose stocks as an investment vehicle:

Making Money 101

You will probably be investing in a low-cost Index Fund and holding until you reach your Number; the fund will usually collect any dividends and reinvest them automatically for you. All you will see is a long-term increase in the total value of the fund (appreciation + reinvested dividends) … frankly, this is all you really care about right now.

Making Money 201

If the urge to invest in individual stocks strikes, you will probably purchase 4 or 5 undervalued stocks (i.e. where the current price does not fully reflect the current and/or future earnings of the company … notice, I haven’t mentioned dividends here) and hold them. You will probably reinvest the dividends into buying more of the same stocks as they probably still represent excellent value. You will keep doing this until you reach your Number (or decide to cash out for a ‘better investment’).

Making Money 301

You will talk to your accountant about the tax advantages of withdrawing any dividends v reinvesting v selling a small portion of your portfolio every year to live off … other than that, you won’t care if you make your yearly ‘retirement’ income by selling stock, withdrawing some/all of the dividends, or any combination of the two.

Still confused?

Think of it this way:

Dividends are what you MAY get if you speculate on some stock (i.e. a piece of paper) …

… Profits are what you WILL get if you invest in a solid business.

If you invest well, eventually the stock price PLUS the dividend (it’s not terribly relevant in what proportion) WILL rise to meet the steadily increasing profits … Warren Buffett has averaged a 21%+ annual return by this simple assumption.

Suffice it to say that I have NEVER (yet) bought a stock for (or despite) its dividend … how about you?