Sources of Personal Income

This article originally appeared on The Div-Net on 2010-07-13.

Last time we talked about sources of income it was in the context of where companies get their income from. We discussed one specific company and how healthy and durable that source was.

Today, I want to talk about your personal source of income. Like companies, you too probably want to make sure you have a diversified stream of income from reliable and durable sources. For most people, that source of income consists of salary, savings accounts, stocks and bonds and perhaps even a rental property. If you have any two of these you are already better than most people on this planet in terms of income.

But chances are you're a reader of this blog because you would like to have more income. And we do cover a lot of ground regarding stocks, dividends and even real estate. But the investment world is not limited to those and perhaps you should consider adding other income streams flowing directly into your pocket.

Let's take a look at some of the possibilities.


Adding more salary to your income stream is probably something you're already doing now. Getting a raise or a bonus is what you work so hard for. We even discussed the topic of return on salary previously. But once you get it, chances are that to get another one you have to work even harder or longer. And at some point this plan doesn't scale anymore -- it can't continue to grow and grow.

So, what should you do? Get another job? Well, that's always a possibility. One can work part-time or on weekends or after-hours or double shift. But again, this only goes so far.

Is all lost then? Not at all. Keep working on (and in) your job but start to look at other possibilities too. Have you considered...

Angel investing

We discussed that by looking to invest on small or startup companies that other investors cannot invest on (because they lack the personal connections), one can even beat Warren Buffett at his own game as well as big-shot venture capitalists who are looking for the next Google and will probably miss the next corner store, butcher shop or flower stand.

If you keep your eyes peeled and your ears tuned, perhaps you could even invest in the next Walmart before the big shots. But if not that, investing in your next neighborhood bar or local gas station might be a start and a solid plan, depending on your capital and expected return.

Investment clubs

Investment clubs are nothing new. But they can be overlooked by many investors because investing often feels like it should be a solitary activity. Nonsense! Investment clubs can actually scale better than solo investing because by pooling together people with similar goals, it's easier to benefit from each other's knowledge and time to analyze companies and find new opportunities.

Often times, investment clubs that are flexible enough may even want to pool their resources together to invest in private companies, do some angel investing or move into real estate.

The benefit is clear: leverage each other's time, money and all get to share the benefit of new ideas from others who may think alike but do so independently.

Start your own business

This is also a topic I've alluded to before but have yet to discuss further. Opening up your own business -- whether part-time or home-based -- can be easier and safer than one imagines.

First, there are many businesses that don't require huge upfront investments nor huge effort or high cost to operate. And while one may think these are easy to replicate and thus should return close to zero to their owners, think again. The trick is to do something you love or have a strong interest in or something you'd love to have but somehow is not available yet or is not easy to get in your area. Or you just need to do it better than the competition. In many cases, you don't need to do all of these, so long as you have the passion or interest.

Let's just consider a few examples that are close to me. I'm sure you can think of a hundred other example of small businesses that you could create easily and that are meaningful to you.

Growing escargot. Yeah, the slimy snails that some people love to eat (especially the french). Turns out my dad used to create escargot in our backyard when I was little. He had plans to sell them, but he never developed the business around it and chose to eat them all instead. Growing escargot is easy -- they reproduce faster than rabbits -- and extremely cheap -- they eat lettuce and other greens. If you have even a medium-sized backyard, you can build a little shed and grow escargot in simple to build boxes. Just make sure you have all the necessary sanitary and business permits and you could sell them fresh or frozen to your local specialty store, restaurants or even grocery shop chains.

Pizza dough. Growing up, I remember us buying pre-made pizza dough from a friend's neighbor. They made the dough at home and packaged them in four or fives and sold them to order. If I were to do this today I'd probably offer multiple options such as whole wheat, yeast-free, gluten-free, special multi-grains, vegan. All organic and natural and 100% preservative-free.

The pill. Yes, believe it or not I have a friend whose grandparents used to make women's anticonceptional pills at home. They had all the permits and licenses and sold them under their own brand name. They never felt much competition from the big brands because they had their local niche market. I would probably be more careful on this one given the risks, but with proper knowledge and insurance this just comes to show that one can get as entrepreneurial as one wants. The sky is the limit.

Homemade jewelry. I actually know two people (not related to each other in anyway) who used to make earrings, rings, pendants and other jewelry at home or at small local shops from cheap metals or semi-precious ones, with semi-precious stones or other good-looking materials. In one case, the person would sell everything she could make to big-name retailers who would sell under their exotic or one-of-a-kind departments.

There. Four small but very real ventures created and run by people like you and me, most of which had a job and a family to attend to.

Know how to cook? Love dogs? Can build children's toys out of stuff in your backyard? Can teach piano lessons over the internet? What are you waiting for?

This article was written by EPIC INVESTOR.


Building a Strong Dividend Growth Portfolio

When it comes to indexing I usually have two views: it's a great tool if one doesn't have the time or inclination to analyze stocks, but it's also a wide catch-all net that brings in the tuna along with the catfish.

So, what should a time-constrained investor do if one doesn't want to invest in the entire market or a sector at once and get the chaff along with the wheat? Answer: Buy the strongest dividend payers from selected industries. And to find out who these dividend payers are one can do their own detailed analysis or read this blog.

Selected pharmaceutical index

The list below is a non-diversified list of strong pharmaceutical companies that have a history of paying dividends. Not all are cheap, but the point of indexing a sector is to get the benefit of the industry as a whole without having to guess or investigate which company has the best pipeline, the best strategy or the best cash position to go after acquisitions.

If one believes, like I do, in the future of the pharmaceutical industry -- which is home to great companies, many international, and robust dividend payers -- then buying the strongest companies is a wise strategy.

Dividend yield-based weighting

Should one buy an equal-weighted index of these companies? Well, first, if by equal-weight one means same number of shares, the answer is no. Share price is too dependent on number of shares, which is arbitrary and as such this index would be arbitrary as well. If one buys an equal number of dollars per company, that's a more suitable strategy but it would still assume that all companies are equivalent, which is not a good assumption.

A better way to index is to use a dividend yield-based indexing: buy more dollars worth of companies with higher dividend yields. This approach has two benefits: 1) one buys more of the higher-dividend companies which in turn boosts the yield of the portfolio and 2) higher yielding companies in the same industry are typically considered cheaper than peers since the yield is higher because the price is lower, so one ends up buying more of the cheaper companies.

However, this pure yield-based approach also has drawbacks: 1) high yielding companies can be cheaper for a reason, and a thorough investigation of these reasons defeats the purpose of this lazy indexing approach; and 2) high current yields could mean the companies have little growth ahead of them and as such the dividend may not keep up with inflation or growth elsewhere.

So, what's the alternative?

Dividend growth-based index

Factoring in current dividend yield as well as dividend growth should provide a much better index because current yield plus dividend growth equals total dividend returns. So, this indexing method is equivalent to saying "buy more of the companies that will return more money to you in form of dividends".

Of course, dividend growth involves making predictions about future dividends. However, armed with fundamental analysis and a long history of dividend growth one can make informed assumptions about future growth and thus minimize the risk of making a bad call.

With this, here's my dividend growth-based index of pharmaceutical companies based on 10-year historical growth rates and current yield and their respective weights.

Ticker 10-yr div. growth Curr yield Curr Price P/E Weight
NVS 13.74% 3.93% 49.55 12.07 2.36
JNJ 12.84% 3.57% 60.54 12.72 2.19
LLY 7.86% 5.57% 35.17 9.07 1.8
ABT 9.26% 3.66% 48.03 14.08 1.73
PFE 7.87% 4.87% 14.77 11.89 1.7
GSK 5.53% 5.28% 34.84 10.2 1.45
BMY 3.73% 5.00% 25.6 14.71 1.17
MRK 3.29% 4.19% 36.3 7.57 1
Putting it all together

The "weight" column in the table above indicates a dollar multiplier for each ticker. That means one should buy 2.36 times more Novartis (NVS) than Merck (MRK).

If one has a budget of $10,000 to allocate to this index, and rounding the number of shares to their nearest whole number, one should buy $1783.8 (36 shares) worth of NVS and only $762.3 (21 shares) of MRK.

The final portfolio worth approximately $10,000 in today's prices would look like this:

Shares Cost $
NVS 36 1783
JNJ 27 1634
LLY 38 1336
ABT 27 1296
PFE 86 1270
GSK 31 1080
BMY 34 870
MRK 21 762
Of course, one should only follow this approach if one doesn't have time to do a thorough due-diligence fundamental analysis and after consulting with their financial advisor.

Disclosures: Long JNJ at the time of writing.


Preparing a Shopping List for Bad Times Ahead

Several pundits online and on mainstream media are calling for another "leg down" or plain depression in the markets soon.

I don't react to predictions, forecasts, star readers or fortune tellers. I will see when it happens. However, it's always good to be prepared for anything -- up markets, down markets, neutral markets -- at all times. As such, I have my shopping list ready in case the forecasters turn out to be right.

Because it's a long shopping list and it's mostly still far from my entry prices, I will just pick those that have been approaching my entry price recently. Many of these are names I already own and am looking to buy more of. Some are new.

Shopping list for the next "leg down"

PAYX (Paychex) - Buy range: $25-21, Current: $25.47
COP (ConocoPhillips) - $47-38, Current: $48.82
PFE (Pfizer) - $13-11, Current: $14.14
RDS.A (Shell) - $48-42, Current: $50.01
CINF (Cincinnati Financial) - $23-21, Current: $25.53
ETR (Entergy) - $75-60, Current: $70.70

Note 1: These are all dividend payers that have been around for a while and paying dividends for a while.

Note 2: Entry prices were based on my model of discounted dividend analysis and a qualitative assessment of earning power. The entry prices typically entail a total return from dividend plus dividend appreciation to 11 to 12%. Any share price growth is extra icing on the cake (and was not factored in the price).

Note 3: There are two oil companies on the list. This is a good thing, because when governments in developed countries start to print money seriously, oil, gas and tanker and pipeline companies will benefit. It's best to own the companies behind these commodities than own the commodities outright for various reasons that are beyond this article's point right now.

Note 4: I started buying Shell a little ahead of my entry price and am looking into buying more significantly when it does enter the buy range.

Note 5: I haven't bought Entergy yet because I haven't had time to investigate their price drop and read their latest 10Qs. As soon as I find out they're still in as good a shape as when I first priced my buy range, I will pull the trigger.

Disclosures: I own shares of PAYX and RDS.A at the time of writing.