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How to Develop Multiple Streams of Income

To achieve financial independence, you must create a level of income to cover the lifestyle you desire. There are many ways to accomplish an income to fund your life experiences. Many work during their life to save money for this purpose. Some are entrepreneurs that start businesses usually with hired managers to carry the workload to create their income. Others invest in passive investments such as rental housing. Here is a look at investing strategies to increase your earnings and create multiple streams of income.

In author Thomas C. Corley’s five-year study of self-made millionaires he found that many of them develop multiple streams of income: 65% had three streams, 45% had four streams, and 29% had five or more streams.

“Three streams of income seems to be the magic number for the self-made millionaires in my Rich Habits study, but the more income streams you can create in life, the more secure will your financial house be,” he writes.

I apply Corley’s thinking to my investment portfolio by identifying several streams of income. One passive income stream is collecting growing dividends from world class stocks. These stocks have a strong financial position, competitive market position, known brand and growing dividend history. I also invest in closed-end funds that pay monthly dividends. This create a diversification opportunity as I can add fixed income, preferred stocks and other types of investments. Lastly and probably more important, I sell options for monthly premium income. This includes selling cash-secured puts and covered calls. I love this strategy and have created a consistent, growing stream of income.

Join me in creating multiple streams of incomes to live the life you desire.

Creating Multiple Income Streams with CEFs

An income investor has several investments available to create income streams. Most turn to dividend stocks and bonds to create consistent cash flows for their living expenses. While both of these investments will provide income, there are additional vehicles to produce money flows. One I like to use is closed-end funds or CEFs. These investments trade like stocks with a market price and can be easily purchased during trading hours on all stock exchanges.

Investors have nearly 400 CEFs to choose from that pay monthly distributions (see listing included). Simply, an investor can create a diversified portfolio of CEFs to create monthly income. Most investors should look at selecting five or more CEFs in different investment categories or type of objective. There are cases with investors creating numerous CEFs such as 30 funds to average one paycheck per day. I guess you can call this one check per day or daily paychecks.

The 10-year Treasury note touched its second-lowest yield before regaining some ground to finish at around 1.51%. The 30-year Treasury was offering a yield of 2.234% last week.  Those meager yields mean that despite grousing about elevated stock valuations and poor corporate quarterly results, investors aren’t finding a lot of safe options to put their money and eke out a decent return. Bespoke statisticians say 41% of stocks on the S&P 500 offer a richer yield than the so-called long bond, or 30-year note. And more than 60% pay a better yield than the benchmark 10-year note. A great alternative is investing in CEFs.

CEFs have some differences compared to stocks such as they have a publically known net asset value or NAV. The NAV is the sum value of the funds holding or intrinsic value. The CEF may trade at a market value that us different than the NAV. This makes it easy for investors to determine if the fund is trading at a premium or discount to its true value or NAV. As an investor, you want to purchase CEFs at a discount to NAV as this can be like buying a $1 of assets for $0.90 or whatever the discount to NAV. Who doesn’t want to buy funds at a discounted price or on sale!

To create a successful CEF portfolio, an investor should create a diversified portfolio of monthly paying CEFs trading at a discount to NAV. The investor can reinvest some dividends to increase their payments over time. This investing strategy can be used to replace income from employment or to supplement other types of income.

The Western Asset Emerging Markets Debt Fund (ESD) is a closed-end fund that invests in bonds issued by emerging-market governments and corporations. As income investors, we love the 8.5% yield… And as value investors, we love that the fund is available for an 13% discount to its NAV. On top of that, bonds are traditionally safer investments than stocks, even in emerging markets. ESD has an extremely diverse portfolio of 235 different holdings. Its largest country allocation, Mexico, only accounts for 13% of its portfolio. And 97% of its holdings are denominated in U.S. dollars.

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Where to Find a 15% Dividend Yield

Investors do not have many choices when looking for income today. Aside from vehicles like annuities, the only place for income is dividend stocks. The dividends will increase with inflation and the stock price will appreciate over time. And many dividend stocks pay more income than the 10-year bond! This is how I like to look at dividend stocks – what I will earn over the next 10 years.

You may ask why I take the long-term outlook. There are many variables affecting the markets that I can’t control or even predict such a significant financial crash (dot com crash, housing bubble, etc.) or market correction. However, if you are in the right stocks you will still earn dividend income and make money over the long-term.

In the U.S., S&P 500 dividends last year were 55% higher than in 2007, the peak of the last cycle, while earnings were up only 29%. Dividends over the past five years have grown at an annualized 13%. Look beyond the recent past and dividends have been vital to long-run returns. Indeed, U.S. shares were worth the same in July 1982 as in June 1901, adjusted for inflation, according to data compiled by Prof. Robert Shiller of Yale. All returns that topped inflation over that period came from reinvesting dividends. Their power is well known: An investor who bought U.S. shares in 1900 has made 2.1% a year in capital, but a total of 6.4% a year once dividends were reinvested, according to Elroy Dimson, Paul Marsh and Mike Staunton of London Business School.

While dividends are an important component to stock returns, I don’t think they are priced into all dividend stocks to reflect their true value. Here is a good example. Income investors will flock to a stock like Altria Group (MO), the tobacco stock, because it is known as a good dividend stock. MO trades around $65 and has a dividend yield of 3.5% so it is interesting as a income purchase. MO already pays out 74% of its earnings as dividends so there is no upside in the dividend payout ratio. EPS are projected to grow at 8% per year so there is upside to increased dividends. However, the forward P/E ratio is at 21 so the stock is priced high due to its income potential. According to my proprietary stock valuation model, MO should be priced near $60 so some of the future growth is already priced in the stock. I will only buy Altria on a pullback below this level.

The income investor should have a blend of stocks producing high income today and some that will continue to growth their dividends in the future. Altria produces income today! Take a stock like Expedia (EXPE), online travel stock, that has a current dividend yield of 1% while trading at $111 per share. Not a stock that an income investor would look to for dividends. However, if you look forward 10 years, EXPE may produce a dividend yield on cost near 15%. How is this possible? Simply because EXPE is projected to grow EPS by over 20% per year in the coming years. And its current dividend payout ratio is only 20%. If the EPS materialize and the payout ratio hits 50% in 10 years, then you can earn a 15% yield based on the current market price of Expedia. In case you are wondering, EXPE is significantly underpriced today based on its future growth rate as it has a forward PEG of 0.83.

Where can you buy a potential 15% yield today? For investors looking for future income, they should add some dividend income and growth stocks to their portfolio.

Get more growth and income stocks here.

PSEC Increases Monthly Dividend by 8.2%

Prospect Capital Corporation (PSEC) announced that Prospect has declared revised monthly cash distributions to shareholders in the following amounts and with the following record and payment dates, representing an 8.2% increase from the previous announcement in early November and representing a dividend yield of 12.8% based on the closing stock price as of December 6, 2012:

11.0000 cents per share for December 2012 (record date of December 31, 2012 and payment date of January 23, 2013); and

11.0025 cents per share for January 2013 (record date of January 31, 2013 and payment date of February 20, 2013).

These dividends mark Prospect’s 53rd and 54th consecutive cash distributions to shareholders and replace the dividends for December 2012 and January 2013 that were previously announced on November 7, 2012.

“Through September 30, 2012 in calendar year 2012, and not including expected excess income in the current December 2012 quarter, Prospect generated net investment income in excess of dividends declared of more than $70 million, or more than $0.33 per outstanding share, representing a significant storehouse of potential future additional dividend value for shareholders,” said John F. Barry, Chairman and Chief Executive Officer of Prospect.

Because of its 2012 record date, Prospect’s 11.0000 cents per share December 2012 dividend should enjoy current 2012 tax rates for shareholders and should not be subject to higher 2013 tax rates envisioned by currently passed United States legislation.

Based on past distributions and assuming its current share count for upcoming dividends, Prospect since inception through its January 2013 dividend will have distributed more than $10.72 per share to original shareholders and approximately $600 million in cumulative distributions to all shareholders.

Prospect expects to declare its February 2013, March 2013, and April 2013 distributions in February 2013.

Buy This Stock with a 7% Dividend Yield for Monthly Dividends

Home Loan Servicing Solutions (HLSS) is an internally-managed owner of non-agency mortgage servicing assets with historically stable valuations and cash flows.  HLSS’ assets are predominately mortgage servicing advances that, along with the related servicing rights, are over-collateralized 30 times by residential real estate. HLSS’ objective is to generate stable, recurring fee-based earnings and dividends throughout the economic cycle.  HLSS is a small cap stock with a market cap of $529 million.

HLSS reported net income of $6.6 million, or $0.37 per ordinary share, for the third quarter of 2012 which was 12% higher than Q2 2012 of $4.7 million, or $0.33 per ordinary share, its first full quarter of operations.  HLLs reported net income of $1.3 million, or $0.31 per share based on 4.2 million weighted average shares outstanding, for the first quarter of 2012.

On October 1, 2012, the Company’s Board of Directors declared a monthly dividend of$0.11 per ordinary share with respect to each of October, November and December 2012.  HLSS has an annual dividend yield of 7.10%.

Home Loan Servicing received gross proceeds of $249.9 million in connection with the follow-on offering of 16,387,500 shares at $15.25 per ordinary share on September 12, 2012. Proceeds from the offering were used to acquire mortgage servicing assets related to non-agency mortgage loans.

On October 19, 2012 Barclays Capital upgraded HOME LOAN SERVICING SOLUTIONS from EQUAL WEIGHT to OVERWEIGHT.

On October 16, 2012 Zacks Investment Research, Inc. upgraded HOME LOAN SERVICING SOLUTIONS from HOLD to BUY.

On October 16, 2012 Merrill Lynch initiated coverage for HOME LOAN SERVICING SOLUTIONS with a BUY recommendation.

First Call analysts have a BUY recommendation with a 2.0 stock rating.

Best Dividend Stocks for 2012 – Mortgage REITs

Attractive Returns to Continue, Prefer Non-Agency REITs

Prefer non-Agency: Heading into 2012 we think that the hybrid/non-Agency REITs generally offer more attractive value with the potential for more capital appreciation plus a more stable dividend outlook given the attractive reinvestment environment.

TWO remains top pick: Against this framework Two Harbors remains our top pick among the mortgage REITs.  The company has been opportunistically adding to its non-Agency position at incrementally accretive risk-adjusted yields.  This combined with the Agency portfolio with favorable prepayment characteristics gives us confidence in the sustainability of the current 16.8% yield.

Agency MBS: While the net interest spread opportunity in the Agency MBS space contracted during 2011 the returns remain attractive by historical standards.  In addition the reduced uncertainty around the prepay environment, specifically government actions, should make for a more predictable return path than in 2011.

Non-Agency MBS: In 2012 we continue to see the spread environment remaining attractive on a risk-adjusted basis with incremental spreads higher than the existing realized spreads.  It is more challenging to know how the securities will perform on a mark to market basis, which will be dependent on the broader
market risk appetite over the short-term.

Capital Raising: Given the attractive level of returns we see that the mortgage REITs will continue to have an appetite to raise additional capital.  The current gating factor is stock prices; current valuations would generally not allow the mortgage REITs to raise new stock at a price below book value.  We see the need for 6-7% premium in the group for offerings to become more likely.

Valuation: The relationship between price to book and ROE is less correlated today than it has been in the past as investors are putting a greater premium on safety versus returns.  This results in higher price to book multiples for the Agency REITs versus the broader group of hybrids.

The table below displays the mortgage REITs with the highest equity score (compellation of analyst opinions with 10 being Very Bullish).

Mortgage REITs for 2012, getrichinvestments.com

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Monthly Income from a Covered Call Closed-End Fund

For monthly income investors, the BlackRock Enhanced Capital and Income CEF (CII) offers an investment option for both growth and income.  CII trades at a 10% discount to its NAV.  The dividend yield is 11.47% which is inline with other CEFs in this category.  CII’s previous closing price was $12.59 and has a superior rating by Morningstar.

The fund invests in large-cap value stocks and includes a call option writing overlay (on individual holdings and the S&P 500 Index). Individual holdings are picked based on strong competitive performance, a good balance sheet, excess cash flow, low debt payments, and management with proven ability to effectively manage though various market cycles. Stocks must meet multiple valuation criteria, including low price earnings ratio, low price/book ratio, high dividend yield, and high return on equity. Analysts and managers like companies that are currently out of favor and that they believe have future growth potential.

Over the latest three-year annualized period, the fund gained more than 4%, beating the the S&P 500 Value Index, which lost 2%.  During the first year and a half using the new strategy (the second half of 2007 and 2008), the fund struggled and underperformed the peer group and the index, but performance improved markedly in 2009 as the new management team took over. Strong performance continues:  The fund is up 7% over the past year and down 1.7% for the year to date while peers are up 2.5% over the past year and down 4.6% for the year to date.

Following June’s distribution reduction, the 11% distribution rate is on par with peers. The fund has used destructive return of capital in two of its seven fiscal years: In 2008, almost half was from destructive return of capital, but in 2010, it was less than 10%. The recent 25% reduction is a positive sign, but investors should question whether an equity strategy can earn 11% in this market. If the call strategy is successful and stock picks continue to be profitable, it’s possible.    The fund offers a standard distribution reinvestment program. If the fund is trading at a premium (including brokerage commissions), then the dividend amount is invested in to newly issued shares.

How to Invest in Monthly Income Close-End Funds (CEF) – Video

Some investors may be confused about what is a closed-end fund (CEF).  There is a difference between an EFT and a CEF.  A closed-end fund is more widely used for income investments as 70% of CEFs are fixed income based.  At Get Rich Investments, we use CEFs for monthly income investments.  You can create multiple streams of monthly income by investing in several CEFs from various market sectors.  This is your own fund of funds using CEFs.   Here is a great video to explain what a CEF is and how it works in the stock market.

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