Imagine if someone had a private bank account that was used solely for the purpose of funding automatic investments that required only an hour or two’s worth of effort per year.
What I have in mind is something like this: let’s say you accumulated 1,250 shares of Vanguard Natural Resources (you could have done this by purchasing $5,000 worth of the MLP over the past four years). It currently pays its unitholders $0.205 per month. Now that’s what I call cash flow. That would work out to $256 per month, or $3,072 per year.
Let’s say you set up a bank account with the exclusive purpose of funneling that $3,072 in passive income from Vanguard Natural Resources into shares of ConocoPhillips and ExxonMobil. Both of those companies, if you use the Computershare investing service, allow you to automatically debit $50 or greater from your bank account each month free of charge because they want to facilitate long-term investment for shareholders of non-institutional means.
Starting with $3,072, you could buy $1,536 worth of Exxon and $1,536 and $1,536 worth of Conoco on autopilot each year. This is what the virtuous cycle of wealth creation looks like. You would now have 17 shares of Exxon that are spinning off $43 of their own income to the account. You would pick up 23 shares of Conoco that would contribute $63 in dividend income to your account.
At this point, the snowball is finally starting to build some momentum and roll down the hill. Maybe Vanguard Natural Resources will raise its distribution next year, allowing you to buy even more shares of Exxon and Conoco. You now have pre-existing shares of Exxon and Conco that are shooting off income of their own.
These are fun background projects to get going on in your own life. You work your butt off to get some surplus capital, and then find something that will drown you in cash over time. Then, you automatically find areas to send that income–ideally, those too will be generating income. At this point, you got a nice automatic income stream that is creating wealth all on its own without any further input from you. In this case, you created your own oil well that could pump out dividends into your various accounts for years to come. The joy is that the process is highly automated and requires little effort from you beyond the initial capital–you build the dividend machine, and it will print money for you from there.
Obviously, it doesn’t have to be oil. You could have a collection of Altria, Reynolds American, and Lorillard stock sending you tobacco dividends that you could employ into automatic investment programs in Procter & Gamble and Aflac. You’re only limited by your imagination. But if you add a couple self-generating assets to your portfolio, you can build little systems that send tidy sums of cold, hard cash your way without any additional labor on your part
**Please note: I used Vanguard Natural Resources for didactic purposes only. I’m not recommending that stock to you. It’s an upstream MLP. If the price of oil falls substantially, you could be hurt severely, particularly if this were a concentrated investment. Yes, Vanguard Natural Resource’s contribution to unitholders held up well during The Great Recession of 2008-2009, but that was because management had intelligent hedges in place. It is up to you to find dividend machines that suit your own needs after you conduct your own analysis for sustainability.
Originally posted 2013-08-23 00:08:52.