Possibly the most underrated tool in portfolio risk management is this: Take the dividends that you are receiving from a cash cow, high income-generating asset, and then redeploy those dividends into something that is either of a higher quality or promises more future growth.
I’ll give an example of how this might work out. Let’s say you greatly enjoy receiving present income, and always want to take actions that have a high probability of increasing your net worth. How would you resolve that conundrum?
For this example, I’ll use something like Linn Energy as an example of our income investments. For most of 2014, Linn Energy was paying out a dividend slightly higher than $0.24 each month. The company owns some very high-quality energy assets, however: (1) the company carries a very high amount of debt, and (2) energy assets are especially known for fluctuating. In other words, Linn Energy … Read the rest of this article!