How to Earn 26.5% on $20,000

Let’s see if this describes your investing during the past few years:

In 2008, you got out of the market, but only after your retirement account lost 35%. Then, even after the market started to rally, you just couldn’t pull the trigger to get back in. The memory of those sleepless nights was still too fresh. 

But sitting on the sidelines hasn’t been without pain. As the market rebounded, your money-market fund paid an average of 0.07%, meaning you were on pace to double your money in 990 years. Savings and certificate of deposit rates were only slightly better.

If this describes what you went through, don’t worry. You’re not alone. As of last week, more than $2.7 trillion dollars sat in stingy-yielding money-market mutual funds.

But it doesn’t have to be that way. I have a way to earn considerably more on your cash…

Millions of investors, one simple solution

I recently asked some of my Daily Paycheck subscribers about their investing experience during the past few years…

Turns out, many of them were in the same boat. They used words like “burned,” “scammed,” “devastated,” and “lost my butt” to describe their fallout from the dreadful 2008 market. Two readers specifically mentioned taking a 50% hit on their retirement accounts. And they complained about the “measly” yields their sidelined cash was earning.

But there was some good news.

I was happy to see that many people said the strategy behind The Daily Paycheck gave them the confidence to finally get back in the market. And I was truly impressed by their results so far. (One subscriber told me he earned $4,004.14 in dividends last year. Another said he’s up 35%.)

Now, no strategy or investment is without risk. But the “Daily Paycheck” strategy focuses on solid, dividend-paying securities to provide steady income streams. And if you have just a little time on your horizon, reinvesting those dividends can grow the streams into rivers.

For instance, my readers who invested in the conservative Reaves Utility Income Fund (NYSE: UTG) received 7.5% more income in December 2010 than they did in December 2009 — just by reinvesting the dividends. Including capital appreciation, they had total returns of 27.3% for the year… and that’s from a utility fund!

Meanwhile, the income my subscribers will receive this month from one of my newsletter’s master limited partnerships (MLPs) will be 9.9% higher than it was just nine months ago. So far, the total returns from that investment are more than 40%.

The market rally might be fizzling, but that won’t stop income growth
In the past few weeks, the market rally has lost a little steam. And maybe you’re worried that you waited too long to get back in. But the beauty of a strategy that uses dividend reinvestment is that your income continues to grow, even when the market doesn’t.

The chart to the right shows your potential annual income stream assuming a $20,000 initial investment in securities with an average yield of 7%. Thanks to the power of reinvested dividends and dividend growth, after 10 years your portfolio could be generating $5,299 in annual income — that’s 278.5% more income when compared to an investor who doesn’t reinvest. In fact, it could be generating an effective yield of 26.5% based on your initial $20,000 investment.

If you have even a little bit more time on your investment horizon (or more money to invest, or additional dollars to invest each year), then the numbers only get better. And keep in mind that these are conservative estimates: They don’t include one penny of capital appreciation.

No one should have to wait 990 years to double their money. And now may not be the best time to plow all your money into high-risk stocks. But there is another alternative.

Action to Take–>
Reinvesting your dividends may not be as tempting as the get-rich-quick schemes you read about. To some extent, it is the tortoise of the market. But after watching what can happen to the hares, you may want to consider a strategy that gets you across the finish line.

P.S. — I believe so much in reinvesting dividends that it is a cornerstone of my “Daily Paycheck” strategy. If you want to learn more about how to implement the same strategy I use, click here. My boss — StreetAuthority co-founder Paul Tracy — used the same strategy to generate $6,639 in December alone. Get the details here.