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How to Invest for the Goal of Growing Income

Why do you invest?

It’s a simple question, but one so few people consider. Investors often fail to understand their reason for making investments, for saving money, or for what they invest in. They fail to ask themselves the fundamental question for making an investment – to discover their “why.”

I believe the biggest why of investing is income. Either income for today, or income for tomorrow. My reasoning is simple: income is what we spend, and spending is how we use money as a resource. All roads lead back to income. So how can we position a portfolio for maximum income either for use today or in the future?

First we have to address a simple problem with an income-focused portfolio. The income must grow over time. Consider this example: I almost took a job with Johns Manville in 1978. The base salary was $12,000 per year. If my income didn’t increase over time (in this case 35 years) I would be living on $1,000 a month. Ouch. If your income is not growing, your standard of living is falling. Your purchasing power is quietly, almost silently eroding.

Therefore income must increase over time. If it doesn’t, you are “getting poor – slowly.” This is what a fixed income investment can feel like. Over time, “fixed” can work against you. So what can we do to minimize this impact and maximize a growing income?

First we need to identify a technique that attempts to achieve consistent predictable returns, then find a way to grow those returns over time. The best method we’ve found to pursue this goal is by investing in solid companies with a historical precedent of paying a dividend and growing that dividend payment over time.

In general, companies increase their dividends payments to demonstrate their confidence in the future of their company (among a myriad of other reasons). It is their way of distributing excess cash or capital. Companies can either reinvest that cash in the business, expand by buying new businesses, pay down debt, buy back shares of the company or pay a dividend to investor shareholders. We want the companies that strike a balance among these, but have an emphasis on paying a dividend to shareholders. It’s even better when the company has a record of increasing this dividend over time.

The ultimate investment occurs when the dividend increases at a multiple of the inflation rate. So, if inflation is running at three percent per year, a company that increases their dividend at 7-10 percent per year not only has the prospects to grow in value, but they are paying investors like us a rising cash flow. This fulfills our goal of consistent rising income.

The strategy sounds simple, but implementation and consistency are the hard parts. It’s easy to become distracted by all noise, the media, where the “Smart-Money” is going that we are all bombarded with every day. It’s more difficult to stick with the solid “boring” strategy than to spend time and resources chasing after the latest muse of Wall Street.

Bottom line: Your income must rise if you want to maintain your standard of living. No one wants a lower standard of living tomorrow. We believe the best method for attaining this goal is a portfolio focused on dividend-paying stocks with a preference for companies that have a history of consistently increasing their dividends over time. Rising income solves a myriad of problems.

If you would like to have a conversation about this strategy, please let us know. We’d be happy to explain how we’re putting these principles to work in your portfolio.

Thank you for being a client of Prosperion Financial Advisors.

Steve Booren

Steve Booren

Steve started his investment career in 1978 with the NYSE investment firm EF Hutton, working in the environment of a large investment company. Desiring to provide clients with objective investment advice, he founded Prosperion Financial Advisors. Learn more about Steve here.

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No strategy ensures success or protects against a loss. The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time. Stock investing involves risk including potential loss of principal. Past performance is no guarantee of future results.