If you are serious about creating substantial wealth over the course of your lifetime, one of the most important things that should be the first priority in your life is getting the rich infrastructure in place. The key is to have a cash-generating asset that is regularly generating money for you to shovel away into blue-chip stocks so that you can have a permanent source of your life that is giving you the money to be a capital allocator, so that you cannot help but get rich.
There are countless ways to put yourself in a position to get over $1,000 per month that is set aside for the sole purpose of giving you regular intervals of cash to invest. You can own a rental home that generates $1,000 in rent in excess of taxes, maintenance, debt, and other costs. Or, if being a landowner and dealing with the inevitable problems that bad tenants can cause is not your thing, then you can sit patiently on some capital and build a basket of REITs yielding 8-10% (because interest rates are so low right now, this is one of the worst times in the past 100 years that you could try implementing such a strategy. It’s generally an idea best left at the back of your mind for now).
Or, you could buy an existing e-commerce website. There are plenty of online sites selling for only 3x their annual profits. If you know what you are doing, it’s a great way to turn a $36,000 investment into $12,000 in annual income. The catch is that it is not truly a passive income source; if it is truly e-commerce, then you are going to inherit the obligation to continue the sales, which is time-consuming. And if it’s more content-based rather than relying on the movement of physical goods, then you will likely need to continue to update the content, otherwise the website will plummet in the search rankings, and your advertising income will be gone. The risks are substantial if you are inexperienced or do not know what you are doing, and there is a good chance that the story will end with you losing everything. But, if you are web savvy and have entrepreneurial instincts when it comes to building things online, then it can be a great way to create regular streams for a low initial capital investment. It’s one of the few areas in life where you can quickly earn 33-50% of your initial investment in annual income, which makes it appealing, but it can also disappear quickly to $0 if you don’t know what you are doing, and that is what makes it risky. Your individual skill set would determine whether this path would be a blessing or a curse.
And, then, of course, there is energy investing. A well-structured portfolio of MLPs yielding 8-14% annually can be a great way to generate income on a regular basis for you to deploy elsewhere. You could quickly turn a $150,000 portfolio of energy MLPs into something that yields $12,000 per year, provided you have a comprehensive yield of at least 8% across the partnerships. Unlike corporation investing in which the corporation has to a tax and then the recipient of the dividend also has to pay a tax, MLP income is only paid by the unitholders. Although there are a few energy MLPs in which this is not the case, the general rule is that you pay no taxes until you sell your partnership units or your adjusted cost basis reaches zero (and each distribution received lowers your cost basis). After your cost basis reaches zero, your distribution gets taxed as a capital gain.
The point is, depending on your skill set, there are a lot of ways to get your hands on something that generates $1,000 per month. Maybe your skill set is real estate, whether you own properties outright or invest through MLPs. Maybe you have a knack for running websites that generate income. Maybe you are good at investing in energy MLPs at attractive valuations and taking the distributions and using them to regularly purchase blue-chip stocks. The ways to do this are countless, and the point is that you do something consistent with your skill set to get the right investment infrastructure in place.
From there, the point is to take that automatically created investable money and set it aside into the absolute highest quality dividend stocks you can find. For someone like me, that would mean General Electric, Procter & Gamble, Coca-Cola, Johnson & Johnson, ExxonMobil, PepsiCo, Chevron, Nestle, Disney, and Colgate-Palmolive. Your list might be different. The overarching thought process is that you get a way to generate $1,000 per month to invest somewhat automatically, and from there, you use it as a little machine of sorts to go through life collecting ownership stakes in the best blue-chip stocks in a systematic fashion.
If you execute this plan for ten years, using the $1,000 per month to buy the best blue-chip stocks you can find, you have a good shot of having $205,000 in blue-chips alone at the end of the period (and this is not taking into account what your cash generator would be worth). If you can do it for twenty years, you will have $759,000. If you can keep at it for thirty years, you will have $2.2 million. And again, this is simply the worth of the blue-chip stocks that are automatically purchased, without taking into account what the cash generator may be worth (hopefully, it will modestly grow allowing you to invest more and more each month with the passage of time, so that you can get to your goals faster).
But if you are interested in building up supersized wealth with blue-chip stocks, I would break the process down into three steps. First, get your hands on an asset that generates good sums of money for you to automatically invest. Then, select the blue-chip stocks of the highest quality in which you will accumulate an ownership stake in for ten, twenty, thirty years. And then, you simply need to arrange your affairs so that you can allow as much money to compound as possible, consistent with the kind of life you want to lead. Strategically, that’s how I would work my way through the analysis of the process.
Originally posted 2014-01-29 08:04:08.