Wednesday, June 11, 2014

How I'm Saving And Investing

The sharp-eyed reader will have noticed what seems to be a discrepancy between my words here and my actions. In my first post, I wrote this about stocks as a vehicle for passive income for this project:

If you are trying to save money over an extended period and you make frequent purchases of stock, your commission costs will likely eat up any profits you might get from dividends. Furthermore, the changing stock price will make it very difficult to earn a consistent rate of return. So this isn't the best option either.
But if you look at my Goal Progress page, I say this:
Note that the funds in this account are invested in stock, so there will be fluctuations in value that are outside my control. I never withdraw money from this account, so any dips are purely due to stock price changes.

So what's going on? Do I believe in using stocks for passive income or not?

For the long term, as a method of ultimately covering my auto loan payments and paying for my Tesla, no. What I am doing now, however, is using stocks as a temporary investment until I accrue enough funds to invest in a hard money real estate loan - about $20,000.

Because the interest rate environment right now is so bad, it doesn't make sense to just let money sit in a bank and earn next to nothing. Instead, I am investing in a dividend paying stock that pays around 5%. Once I hit the $20,000 milestone, I'll sell the stock and then invest that money in a hard money loan earning 9%.

But, as I mentioned earlier, I do need to watch out for commission expenses and stock price fluctuations. To help keep commission expenses low, I don't buy any stock until I have enough funds to buy at least 10 shares. (I'm using Scottrade, which has a $7 commission.)

The next big question is what stock am I buying? I am quite partial to Realty Income (O). It's a real estate investment trust, so I understand the business. As a REIT, they are required to pay out 90% of their profits as dividends. Furthermore, Realty Income is somewhat unique in that they pay a dividend monthly, instead of quarterly, like most stocks. They also have a solid history of paying dividends and increasing their dividend. They've paid 524 dividends, increased the dividend 75 times, and have had 66 consecutive quarterly dividend increases. In fact, they promote themselves as The Monthly Dividend Company. Their dividend track record is here. Monthly payouts also mean faster compounding of the dividends.

I'm not too worried about changes in the stock price. I've been investing in this company for years and have seen the price vary from $38 to $54 per share. I buy this stock for the dividends and if the price drops so low that selling some would cause me to lose money, I can afford to sit and wait until it rises again. Saving for my Tesla is a multi-year journey and I can afford to ride out the dips in price.

At the current price of around $44 and a $2.18 per share dividend, O is providing a 4.9% dividend yield. So my mid-term goal is to save money and invest in O until I reach $20,000. Then I'll sell the stock and invest that $20,000 in a hard money loan earning 9%, which is almost double what O is giving me. I'll take the monthly payments from that and funnel them back into O stock. Rinse and repeat every $20,000.

Why am I waiting until I save $20,000 before investing in a hard money loan? At 9%, that amount gives me $150 per month. Anything smaller isn't really worth the effort and paperwork for me or my hard money lending partner. As anyone who has bought a house knows, real estate transactions involve lots of paperwork, lots of signatures, and lots of shuffling papers around between parties. And title companies always seem to wait until the last minute before telling you they have to have you sign this document, get this document signed and notarized, etc. There's always a flurry of activity when a loan closes. If I'm going to go through that on a regular basis, I want to get a decent chunk of change out of it.

Now, for legal reasons, I better be sure to tell you that this post is not a solicitation to buy or sell any securities. I am not an investment adviser. Consult your own financial professional. Some assembly required. Your parents have to put it together. By Meco.


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