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.
Isn't the dividend about $3.00 for 2013 so that would make your numbers a little more conservative then expected?
VNR looks interesting but I think MLP are out of my comfort zone. However, the 9% yield is very, very attractive. I have a small position in BP and CVX and may do some DD on VNR to see if I can utilize it to imrpove my cash flow to build up my oil further.
Also, where is the number $35,000 as it is in the title but not in the article. Is that reached after several years or a goal?
Hey Stephen! At the time I wrote this, VNR was trading at just under $28 per share. For 1,250 shares, we'd be talking about $35,000 for that initial investment. I wrote this article before VNR raised its monthly distribution from $0.205 to $0.2075 (I believe that happened on August 20th), so there should be a decent amount of conservatism built into this particular projection.
Ahhh now it makes sense. Great article.
I see a common theme among your articles. They are: buy oil, tobacco, KO and JNJ and reap the rewards in several decades.
Does that pretty much sum it up?
Hi Tim, I'm a new follower of your blog, and it's inspired me to think differently about long term investing. I've understood dividend growth investing for 5+ years but couldn't seem to find any stocks at reasonable prices (ie, low PE ratios). You've opened my eyes to the super major oil firms and now I own some of most.
More importantly, your blog has helped me in my own plans on escaping the rat race. I had a chunk of change to invest, as I've been sitting on cash, scared for years, and I just started asking myself, "What amount of firm X do I need to buy today to provide me with $1000 in dividend income in 5 years (which is my self-imposed "I'm scaling back my work hours to part time")." By getting 50-60 of those purchases now/as soon as possible, their dividend payments will have time to grow to produce $1000 each in 5-7 years, allowing my wife and I to escape!
Using my handy financial calculator, the current yield of a stock, and the historic growth rate of their dividend, I'm building the financial future based NOT on gross dollars saved, but on dividend cash flow per month, as the problem I've always seen with "saving $1-2 million in index funds" is 'then what?" If you don't know what to do with it, you're probably at risk of losing big chunks of it in major market corrections and perhaps doing something stupid (like sell it at a huge loss),
Part of the fun in hitting my goal of $1000 per year in dividend income per stock is to determine that I need $5000 of this one, $7500 of that one, $3000 of that one, etc, knowing that each purchase I make from monthly extra cash flow is another one of the "bricks" in my five year future foundation (FFF?)
I've been expanding into some mREITs in small doses, as I believe the risk/reward after the massive sell off puts them at a value price, and with reinvested dividends, I get the "growth" in the form of 10-15% more shares, even if they don't increase dividends per share.
Thank you for your inspiration, as iron sharpens iron…..
Tim,
Love your blog. It was through you that I got started in DGI several months ago.
My question is this: what happens when interest rates inevitably rise? Will the yield of our long term investments be adversely affected, in either absolute or relative terms?
Also, what are your thoughts on BDCs? I recently took a position in PSEC. I know we are not supposed to chase yield but I feel their track record (though short, they kept up their divvy through the last crash in 08-09).
Tim,
Love the articles and the site. I'm a young DGI myself and enjoy your work and appreciate it! I was wondering about something. Like in this article, I often read you recommend MO, LO, RAI but rarely PM? What are your thoughts on PM? Do you prefer the domestic tobacco scene or am I just missing your love for PM in an article I haven't made it to yet 🙂 Thanks again
Hi Tim
I like to say thanks for all your hard work I appreciate your blog thanks I see you are a fan of Berkshire what do you think of markel ticker mkl