How to Earn 26.5% on $20,000

They say the first time parents feel old is when they realize their children are old. When I graduated college, my mother still called me her baby. When I turned 40, she said I still reminded her of a schoolgirl.

Then one night, my mother and I started discussing income-investing ideas. As a retired librarian, my mom looks to supplement her city pension with safe, dependable income from her investments.

All of a sudden, the phone went quiet. She sighed. “If my own daughter is investing in income stocks, then I must be old.”

I am bringing up the tail end of the baby boomers. There’s no question we got older. The real question is whether my generation has gotten any wiser.

It might be considered a small miracle if we see a Social Security check in our lifetimes. A company pension plan? Are any still left out there?

Millions of baby boomers invested their 401(k) plans in aggressive growth stocks and patiently waited for the promise of a comfortable and secure retirement. Income investing was for widows, orphans and the faint of heart.

How is that working out for the boomers?

Well, things aren’t quite going according to plan. Most 401(k) plans had barely begun to recover from the tech bubble when the financial crisis came along in 2007. By October 2008, retirement plans had lost $2 trillion in the downturn. And even now, with a market rally at our backs, the Dow Jones Industrial Average is hovering around 10,000 — right back where it was in 1999. Ten years of gains… gone.

Boost Your Income from $1,400 to $5,299 in Just a Few Years
Ten years later, baby boomers are looking at investments differently. In fact, for the first time in their lives, their investment needs are in lock-step with those of their parents.

Even the younger generation is paying heed to the wisdom of diversifying with income investments. They are starting to realize that income investing, especially when coupled with a dividend reinvestment strategy, is an effective way to not just generate income from — but also grow — a portfolio.

The chart above shows your potential annual income stream assuming a $20,000 initial investment in stocks 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.

Doesn’t leave much doubt in the power of dividends, does it?

The Easy Way to a High-Income Portfolio
That’s why I wanted to come up with an easy way for investors to build a portfolio of frequent dividend-paying investments. I wanted it to be appropriate for investors who have current income needs as well as those who have a few years to build up their portfolio through reinvestment, providing a higher level of income for the future.

What I found (along with our Chief Investment Strategist, Paul Tracy) is that there are some common themes that should facilitate the growth of a portfolio’s income stream.

Global Exposure: Many countries offer higher dividend yields than the U.S. While the average yield of the S&P 500 is hovering around 2.2%, New Zealand’s All Ordinaries Index boasts an average yield of 5.0%. Chile even requires companies pay out 30% of earnings to investors.

Foreign economies are also growing faster than the United States. The International Monetary Fund projects the U.S. economy will grow by +1.5% in 2010. Meanwhile, Australia is estimating its growth rate at +2.8% in the next fiscal year. Some experts are predicting China’s economic growth could surpass +9.0%.

Small Capitalization Opportunities: Companies with smaller market capitalizations have proven over time that they typically outperform their larger peers. As they grow earnings faster, they have the opportunity to boost their dividends faster. While income opportunities in small caps are more limited, they are usually worth the time it takes to ferret them out.

Tax-Advantaged Income: There’s an age-old expression: It’s not what you make, it’s what you keep. That is especially true for income securities. even with existing tax rates, tax-equivalent yields on securities that offer tax-free income (like municipal bonds) can push into the double-digits. And since tax rates may be rising in the foreseeable future, tapping into tax-advantaged income could become even more important for income investors.

Monthly Payers: If you’re looking for a steady, dependable income stream, there’s nothing like a security that pays monthly. Although some individual stocks pay monthly, the vast majority of monthly dividend payers are closed-end funds. Many of these funds have a strong track record of delivering above-average yields for a very reasonable fee.

I believe so strongly in these themes that I’ve made them the guiding light of my brand-new newsletter, The Daily Paycheck.

In this income newsletter, I’ll be investing right alongside you with $200,000 (yes, that’s real money) to construct my “Paycheck Portfolio.” My goal is to end up with a portfolio that generates a steady stream — daily if possible — of above-average income. I will also be reinvesting the portfolio’s dividends.

My aim is to provide valuable income-producing ideas, whether you have $2,000 or $2,000,000 to invest. It’s designed to benefit both investors who require income today — like my mom — as well as those who have time to reinvest for the future — like me.

I just published my first issue yesterday, so it’s not too late for you to join me today and benefit from my first seven picks I added to my portfolio yesterday. All you need to do is visit this link.