Tag Archives: income

An Example Of Dividend Hors D’oeuvres With Southern Company

Southern Company is a solid example of a utility that more or less plods along over the years. Eventually this leads to a higher share price, but this certainly doesn’t have to happen instantly or on anyone’s schedule. This article looks at the concept of collecting dividends while you wait for the business performance to be reflected. In the income world, there’s a general phrase that goes something like this: “I’m getting paid to wait.” The idea is that stock prices are finicky, especially in the short term, but dividend payments tend to be much more consistent. If you’re primarily focused on the cash stream an investment throws off, you’re apt to be much better prepared to withstand the natural unpredictability of other people’s bids. Whether the share price goes up or down, sideways or shoots to the moon, that dividend payment is there regardless. You get paid for being a part owner of the company. John Neff had a particularly applicable quote in this regard: “As I see it, a superior yield at least lets you snack on hors d’oeuvres while waiting for the main meal.” That’s the sort of sentiment that allows you view business and investment performance rationally. Instead of relying on bids of what other people may or may not be willing to pay, you can focus your attention on being a partner in a successful enterprise. Eventually the main meal (capital appreciation) comes along anyway , but in the interim, it can be useful to see cash coming your way. I’d like to illustrate this notion using Southern Company (NYSE: SO ), a southern electric utility, as an example. On September 9, 2014, shares of Southern Company closed at just under $44. On September 10, 2015, shares closer around $42.50. Now instantly this is a great way to determine whether you happen to have a short-term or long-term investing mindset. For the short-term speculator, this would be pretty bad news. You need things to happen quickly and on your schedule. Seeing a security decrease in price, especially if you want to sell, simply isn’t great news. Your plans for a quick profit have been thwarted. On the other hand, the long-term investor has a few things to cheer. First, let’s think about the income side. Last year you would have been in the middle of collecting a $0.525 quarterly dividend payment, or $2.10 on an annual basis. On a $10,000 investment, for example, this would equate to about $477 in dividend payments. This year you would be collecting a $0.5425 quarterly dividend payment, or $2.17 on an annual basis. Without you doing anything on your part, your income would grow to $493, or an increase of about 3.3%. If you choose to reinvest, you could add 11 or 12 shares, to further increase your income by about $25. In other words, 3.3% per share dividend growth could have turned into 8.6% total income growth . Speaking of reinvesting, you can now do so at a lower valuation and thus higher yield. More than that, you could commit new capital with a better value proposition. Your investment buck now goes a bit further. If an investment is eventually going to be worth much more — which, incidentally, is near certain given increasing earnings and dividends over the long term — I want the opportunity to buy as much as I can at the same or lower price in the interim. If I’m regularly buying gasoline or my favorite cereal, it harms my purchasing ability when prices rise. Higher gas prices take away from funds available to buy cereal and vice versa. That much is plain. The same holds for stocks. With no intention of selling in the short term, and indeed an inclination to buy more, lower prices are what one ought to be rooting for. Receiving and reinvesting a dividend along the way can help illuminate this mindset. You’re regularly buying more. And naturally it isn’t just limited to a one-year timeframe. Share prices do all sorts of things over longer periods of time. In September of 2011, shares of the Southern Company were trading around $41. Today, as noted, this number is closer to $42.50. Once more this looks like rather sour news — four years and barely any price appreciation whatsoever. Yet not all it lost. In fact, it good be good news if you’re looking to accumulate more and increase your overall cash flow. First, you would have also received dividends along the way — to the tune of $8 per share owned. As such, your average compound gain would have been over 5% per year. Certainly nothing to text home about, but clearly quite far from negative returns. Dividends don’t get their fair share in stock charts, but they can certainly be a central component of returns. Just as important is that you get to reinvest at similar prices in an improving business. The share price is about the same, but the underlying earnings power and cash flow generated has increased; thus creating a “springboard” type effect. Here’s a look at the September 9th closing price and subsequent dividends an investor would have received during the past four years: Share Price Dividends 2011 $41.32 $1.93 2012 $45.91 $2.00 2013 $41.23 $2.07 2014 $43.97 $2.14 2015 $42.46 If you looked at a stock chart, you might think that you more or less broke even. If you add in dividends, you’d know you’re well above “breaking even.” For you to see a negative return in nominal terms, you would need the share price to be under $35 — equating to a dividend yield over 6%. This is possible, but less and less likely as the time goes on and the payout continues to increase. Just as important is the idea of reinvesting. With a $10,000 beginning investment, you would start with approximately 242 shares turning out $457 in annual income. This year you would be on your way to collecting $525 in payments, or a 15% increase. This is without any effort on your part and by simply collecting the payments. If you chose to reinvest, those 242 shares could have become 290 shares, generating $630 in annual income or a 38% total income increase. The shares would be worth about $12,300 today. To simply “break even” you would once more need a share price under $35. Moreover, this doesn’t account for the larger income stream to be received. In short, something like the Southern Company is a good example of the concept of dividend hors d’oeuvres . The idea is that an ongoing, stable and increasing dividend allows you to keep focused on the business. You get to snack while the price bounces about. In fact, you get a bit more out of the process when the share price stagnates or even declines. If your time horizon is long enough, eventually it becomes very difficult for a profitable and growing business to not be worth more. As seen above it can go years with a similar share price, but sooner or later investment performance and business performance tend to even out. Further, once you add in dividends and reinvestment, it becomes especially difficult to not get richer over time . Yet before that time comes, a lot of things can happen. By focusing on the appetizer — in this case the dividend — you can stay focused on the long-term success of your partnerships. Disclosure: I am/we are long SO. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

An Overview Of Where Taxable Income, Closed End Funds Stand Today

Taxable income closed end funds include a vast and diverse group of investment choices. The category has seen severe declines in market values, often out of line with declines in net asset values of the funds. In this first installment of a planned look at opportunities in taxable income CEFs, I present an overview of the space using available searchable parameters. I’ve been thinking a lot about income from closed-end funds recently, both taxable income and tax-free income. CEFs provide extensive opportunities for both. Income is, to a large extent, the raison d’être for CEFs. Even most equity funds are primarily designed around generating income. Several are pitched to investors as being tax-advantaged which helps avoid giving up a large fraction of the income to the government. Fixed -income funds come in many flavors, but the two primary categories are taxable and tax-free. Tax-free means municipal bonds. I’ve written on municipal bond CEFs recently. For the income investor in mid to high range tax brackets, they can provide stable income with excellent taxable-equivalent yields. Tax-free CEFs may be national, which means they are exempt from federal income tax, or state-specific, which means they are exempt from both federal and state taxes. In most cases, a resident of a high-tax state like California or New York will find better tax-adjusted returns from the state funds. In general, I would say that for a high-income investor, either tax-advantaged equity or municipal bond fixed-income are the preferable options for a taxable account. But what about income in a tax-deferred or tax-exempt IRA? Here, one might want to look at the taxable income funds. This is a remarkably diverse group ranging from straightforward corporate bond funds to funds that specialize in extremely complex debt instruments, from purely domestic to global, developed to emerging markets. I use three sources to start my research on closed end funds. Each uses its own set of categories and each is erratic in how it assigns funds to categories. This often makes comparisons at the highest levels difficult. Muni bond funds are all more or less alike: They invest in municipal bonds. They vary, of course, in portfolio quality, durations, leverage and other bond metrics, but comparisons are reasonably straightforward. This is much less the case in taxable income. With this in mind, I plan to start here on a series covering this broad category. In this first entry I am going to survey the landscape and try to give shape to the state of the broad category. In subsequent installments I plan to highlight individual funds or clusters of funds. As as start in making sense of the diverse categories I’m trying to cover, I’ve created a screen that includes the CEFs comprising the domestic taxable income categories from cefconnect ex. preferreds. This is a group of 129 funds. I’ve run those funds through cefanlyzer’s screening tool. Because liquidity is a real consideration in CEFs, I’ve dropped the bottom dectiles on market cap and average volume. This takes the list down to 105 funds. Each of the data analyses here is based on those 105 funds at the September 9 close. First parameter I want to discuss is discounts and premiums. This is a major consideration in evaluating CEFs. Note that I said a major consideration, not the major consideration. I tend to write a lot about discount status, both in absolute terms and relative to either an individual fund’s recent history or to its peers. This should not be taken to mean that discount is the overriding consideration. Funds often carry deep discounts for good reasons, good enough to dismiss them from my consideration. But I will always look at discount/premium status and for the most part, I’ll stay away from any fund priced at a premium. Other, successful CEF investors are willing to buy funds at a premium. I understand their motivation but, from my point of view, there is almost always an equivalent alternative that can be bought at a discount. Because CEFs are primarily income vehicles, the distribution will often drive the magnitude of the discount/premium for a given fund. Eli Mintz has discussed this in the context of municipal bond funds . In that category funds are more or less similar, facilitating this sort of comparison. In the diverse group I’m considering here, one has to be careful about trying to compare quite dissimilar funds using the same metric. Mintz argued that discount/premium levels adjust under the influence of market forces that look to equilibrate the distribution yield. He describes a relationship between NAV yield and discount/premium such that at higher NAV yields funds tend toward premiums and at lower NAV yields funds tend toward deeper discounts. For municipal bond funds, he looks for opportunities among funds that fall below the trend line describing that relationship. Emphasizing that there are many more differences among this population of funds that there are for muni bond funds, let’s take a look at that relationship. (click to enlarge) That chart is hard to sort out, so here it is with the high-end outliers cut off and some labels. (click to enlarge) Cut off at premiums above the scale on this chart are the two PIMCO funds, the PIMCO High Income Fund (NYSE: PHK ) and the PIMCO Global StocksPLUS & Income Fund (NYSE: PGP ) with sky-high premiums one sees on the first chart. On this chart Oxford Lane Capital (NASDAQ: OXLC ) looks interesting. OXLC has its supporters, and I’ve been among them in the past. On the whole, I have to say it’s been disappointing in the more recent past and at this time I cannot recommend it. But it does serve to illustrate how difficult a tool like this chart can be if the data set is not optimal for the analysis. OXLC is quite different from most of the rest of the funds in this group as it is, in many ways, more a business development corporation than a closed end fund. This may be part of the problem as closed end funds are, by definition, closed. OXLC on the other hand has expanded with new offerings, which may not have been in shareholders best interests. If I still held OXLC, I’d keep it; it is, after all, making a strong payment. But before I’d buy into a position, I’d want to be more comfortable with management’s concern for shareholders than I am right now. In the next chart I zoom in even more in an attempt to resolve the center. I’ve cut this view off at par value (P/D = 0), so everything here is priced at a discount. (click to enlarge) There are statistical measures of how far a given data point is from the trend line, but one can simply draw a line parallel to and below the trendline to subjectively filter for funds that look good on this basis. Readers who find this analysis of value interesting will want to look more closely as some of the funds below the red lines. Most evident would be the group: the Virtus Global Multi-Sector Income Fund (NYSE: VGI ), the Brookfield High Income Fund (NYSE: HHY ), the Credit Suisse High Yield Bond Fund (NYSEMKT: DHY ), the Avenue Income Credit Strategies Fund (NYSE: ACP ) and the Ivy High Income Opportunities Fund (NYSE: IVH ). I am not familiar with any of these funds and can add nothing of substance on them at this time. I am simply pulling them out to indicate how this tool may be used. At the high end of the NAV distribution scale we find two Nuveen funds below the trendline. The AllianzGI Convertible & Income Fund (NYSE: NCV ) and the AllianzGI Convertible & Income II (NYSE: NCZ ) are interesting. These have seen a severe distribution cuts and have fallen from a high to modest premiums to the discounts seen here. Both have been solid funds over time and each may present value at their newly reduced distribution levels. They may be appropriate in a speculative niche of an income portfolio. I recently wrote about these two funds here where I suggested they are worth consideration. My opinion right now is that I will wait for the dust to settle a bit more before making any moves. Continuing on the subject of premium/discount status here’s a look at the full spectrum of funds under consideration. (click to enlarge) As we see in this chart all but a handful of funds in this category are priced at a discount to NAV. The stats on the distribution are shown in the table. The fact than only five of the funds are priced at premium valuation is unusual and reflects the fact that investors have been selling off taxable income CEFs. The statistical measure for how much current premium/discount varies from values over time is the Z-Score which can show how unusual the present situation is. The Z-score compares current valuations to average valuations. Negative Z-scores indicate discounts deeper than the average (more negative) and positive values indicate current prices is at a greater premium to the historical average. The absolute number tells us how far from the average the current values is. Z-score can indicate how likely or unlikely current status is based on historical distribution, but for that to be valid, the distribution must be statistically normal. Most premium/discount distributions do not satisfy that condition, so I’ll not put probability values on them here. However, if one has reason to believe a fund’s discount/premium is likely to revert to its mean value then negative Z-scores below, say, -1.5 would be strong indicators that a close examination of the fund could be worthwhile. Here then is the distributions of Z-scores for the funds in the taxable income group. (click to enlarge) (click to enlarge) (click to enlarge) The preponderance of negative Z-scores over 3, 6 and 12 month scales shows just how strong the selloff in this category has been. Looking at the distributions in tabular form shows the following. The median Z-score for 12 months tells us that the current discount for half the funds stands at more than 2 standard deviations below the average value. One will certainly not choose to purchase a fund on the basis of Z-scores alone, and I certainly do not recommend doing so, but these distributions are, to my eye, a clear indicator that something is amiss in the taxable-income space. Sufficiently so, that bargain shoppers should be able to find opportunities here. The next aspect of these funds I want to explore is distribution yields. When a fund is in discount territory (as more than 95% of these funds are) distributions at market price are greater than the distribution yield at net asset value. To me, this is one of the advantages of buying a fund at a discount. Here then are charts showing the distribution yields on price and NAV for the funds. (click to enlarge) (click to enlarge) Here are the stats. The median fund is paying just shy of 8% to its shareholders. Again, this is a space where an income investor should find appealing opportunities. “But,” you ask, “how safe are those distributions?” That is, of course, a very reasonable question in the current bleak environment for income opportunities, particularly in light of several recent sharp reductions in distributions by taxable income funds (discussed recently in this article). One measure of distribution stability is undistributed net investment income (UNII). If a fund is paying out more than it is earning, i.e. UNII is negative, it should be seen as a red flag. It does not necessarily mean a distribution cut is imminent. Nor is positive UNII a guarantee that distributions will not be cut. In addition, fund sponsors vary widely in the timeliness of reporting the UNII values for their funds, so the screeners and aggregators of data often are reporting data that is out of date. With these caveat in mind, let’s look at a picture of how the UNII that funds are reporting at this time. The chart shows the percent by which a fund’s UNII exceeds its distributions. Negative values indicate that a fund is (or was at last reporting) paying out more than it is taking in. The decline of the high-flying Pimco High Income Fund over recent months, culminating in a sharp distribution cut last week, is a consequence of a fund paying out distributions beyond its earnings. (click to enlarge) This tells us that roughly three-quarters of funds may be in situations where their distributions are in trouble. There is considerable unreliability in these data, but the fact remains that there is a cautionary tale here. Fund managers are extremely reluctant to cut distributions. Many will go too long before they do so. Clearly recent conditions are highly unfavorable for high income investing, so any potential buyer will want to research this matter thoroughly. No general discussion of closed end funds would be complete without consideration of leverage. Most of the funds under discussion here are leveraged. This is a primary tool in the CEF manager’s kit for generating high income. But leverage necessarily comes with risk, particularly as we start to move into a rising-rate environment. Here is the distribution of leverage among the funds. (click to enlarge) Median leverage is just below 30%. Fewer than 10% of funds have leverage below 3.5% and at the high end several funds exceed 40%. This is, of course, a meaningful risk factor. There are, of course, many other considerations that go into an investment decision in one of these funds. Portfolios vary enormously in terms of credit quality, portfolio duration, geographic distribution, and types of investment. Some are primarily invested in corporate bonds; others hold and trade all sorts of esoteric debt instruments that all but the most sophisticated investors fail to fully understand. Portfolios change quickly, so even careful research may be based on out-of-date information. These are but a few of the considerations that go into evaluating a fund. What I’ve tried to do here is give a broad brush picture of the space using screenable metrics. Such metrics are only a start. At best they can only provide a list of candidates for further research. In my future installments I plan to report on funds that emerge as candidates from analyses like those described here. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

How I Created My Portfolio Over A Lifetime – Part I

Summary Introduction. Three ways to build a portfolio. What types of assets to include. Patience and income have been the keys to my long-term success. Conclusion. Introduction Obviously, there are many ways to construct a portfolio and allocate funds across different classes of assets. The method described here is how I do it. Having a set of principles and specific goals helps me to stay on the right path, and I hope my explanation will help readers to formulate a system of investing that works for them. The methods I use as described in this and articles to follow are meant to provide a flexible set of guidelines that can be modified to fit any investor’s needs. If you are just starting out on your lifetime investment adventure, it is important to establish a plan with reasonable, achievable goals and intermediate milestones. I focus on the next milestone to alleviate the frustration that can creep in upon setbacks (which are a natural part of investing). Each milestone is within reach in just a few years, so it is always achievable. Once a milestone is achieved, I just plod on toward the next one. When I was in my 20s and just out of college, I started out with a goal to save $25,000. Back then (in the 1970s), that was a lot of money. I attainted that goal within four years after graduating. The next goals was to double it to $50,000; then $100,000; and each milestone thereafter was to hit the next $100,000. The great thing about having a plan and sticking to it is that it gets easier to achieve each new milestone, especially after hitting $300,000, because you are not doing it all alone. Your money is working for you, too. Or, at least, it should be if you are doing it right. I have to admit here that I strayed from the path a couple of times and got behind. I still had a lot to learn. I was good at saving, but the investing part was not working as well as I had hoped. Initially, I was accepting more risk than I needed to in the hope that I could achieve those milestones faster. In contrast to the now-famous quote of Mr. Gecko from the movie “Wall Street,” greed is not good for most investors. It generally gets in the way of consistency. When you win, you win big; but when you lose, you lose big! If an investment loses 50 percent of its value, it require a 100 percent gain just to get back to even. So, it took me more than a decade to realize what I was doing wrong. Then I read an excerpt from a study that showed how 40 percent of the total return of the S&P 500 had come from dividends when measured over the very long term (as in a lifetime, or 30-50 years of saving and investing). Suddenly it dawned on me that by looking solely for appreciation, I might be missing as much as 40 percent of the potential that the stock market had to offer me. That was revolutionary and so began my investment approach evolution. One other thing happened during my formational period. A married couple with a new baby, friends of mine, came to me with a question: If I had a baby (which I did not at the time) and wanted to put away money for his/her college education, how would I invest it? This is way before 529 plans, so that was not an option. It was also during the early 1980s when interest rates were sky high (like 15 percent for 30-year Treasuries). They didn’t want to invest in stocks. So, I suggested that they invest in zero coupon treasury bonds, then referred to as CATS. They did. I didn’t. They are happy. I am sad. They were able to lock in a 12 percent yield. By the time their baby turned 18 years of age, they were able to sell the bonds they originally bought at a price of $25,000 for well over $200,000. Of course, they had to pay taxes on the interest each year as it accumulated, and then they paid capital gains on the amount of appreciation above the accumulated interest, but that was well worth it. If they had held those bonds for the full 30-year term they would have accumulated nearly $750,000. This sort of investment return is not achievable in today’s environment of artificially low interest rates. But the pendulum always swings and often to extremes, so be ready to jump on the opportunities that are available when they come. The point to all this “experience” chatter is to frame the answer to why I invest the way I do. I invest with a long-term time horizon, even now at age 66. I need my money to last for at least another 20 years for me and my wife. I would also like to leave a nice nest eggs for our two children. Thus, my horizon extends beyond my own lifetime. That is, by definition, long term. And that is how I invest: for the long term and for a rising stream of future income for me, my wife and our children long after we are gone. What is your time horizon? Think about that and make sure you define it well. You are not just investing for when you begin your retirement, but for at least another 20-30 years or more after. Make sure your goals align with those needs. Three ways to build a portfolio There are basically three ways to invest for the long term, in my opinion. This, of course, is predicated on a strategy of buy-and-hold for the long term. If you are trading in and out of stocks like I did before I learned my lessons, there are many other methods and systems to follow, none of which will be mentioned in this article. Sorry, but I am what I am. Buy on the dips Dollar cost averaging Buy only after a bear market Of the three listed above, I mostly use the latter. That is why I wrote a lot of articles until about two years ago when valuations were still cheap, and also why I have not been writing as much for the last two years, as valuations rose to historically dear levels. I am not predicting a crash, although a bear market does seem overdue at this point. We are in the middle of a correction, and I have no idea whether it will turn into a bear market or if the markets will recover to set new records. That is a discussion for another place. But I am collecting my dividends and interest, accumulating cash for the next great opportunity when it does finally come. Buying on the dips has worked wonderfully for investors since March 2009. It is a great way to systematically add quality stocks to a portfolio when valuations are below historical averages. Whenever the stock of a great company slips by more than ten percent (or whatever percent seems appropriate for that stock), buy some more. It is simple and it works during a bull market. But it does not work so well during a bear market. That should be obvious. If a stock falls ten percent and one buys, then it falls another ten percent and one buys, and then it falls some more and more, it can get nerve wracking and one may begin to question their own actions. The long-term investor will be fine over the very long term, but he/she may suffer losses in the short to intermediate term. The market will recover and, assuming the investor has bought high-quality stocks, so will the portfolio. The dividends will just keep on being paid, adding more cash to be invested to create more income. There is really nothing wrong with this method. Dollar cost averaging works in a similar fashion but with a twist. The investor continues to invest the same amount at specific intervals. When the stock is high, one receives fewer shares. When the stock is low, one receives more shares. It is a method that is simple because it takes most of the decision-making about when to invest out of the equation. It does not really optimize investment return, though. And it is also reliant on buying quality companies to hold for the very long term. Even the best companies go through difficult times, but the best of the best evolve with the times and find a way to right the ship. Selectivity is always a key to investing. Why do I generally buy only after a bear market? The simple answer is I like the lowest cost basis I can get. To expand on that answer a little: I prefer to not use trailing stops, so I buy at prices that only come along very infrequently. Why do I not use trailing stops, you ask? Because with high frequency traders [HFT] able to move the markets at the blink of an eye and with the creation of exchange traded funds, the chances of getting an order filled way below the stop prices is way too high. I have friends who got stopped out of long held positions at losses of 30 percent or more on the day of the flash crash on May 6, 2010, even though the trailing stops they used were set at no more than ten percent below the opening price that day. The Dow Industrials Index (DJIA) fell about 600 points in about five minutes and was down nearly 9 percent at its lowest point, only to spring back, recovering most of the loss for the day. There is more to this than HFTs at work here, but that is an explanation for another time or this article will become way too long. I will discuss these varying methods in greater detail in another article with examples included for comparison. What types of assets to include The simple answer is “everything.” The purpose is to achieve diversification. I will explain the purpose and my goals for diversification in another article. The basic rule is that by diversifying across different asset classes, an investor reduces the risk of having everything in a portfolio fall in value at the same time since some assets often move counter to one another. These are the types of assets that I own: Individual stocks ETFs Individual bonds (corporate, municipals, federal government issued or backed) Bond funds Real Estate rental properties Precious metals Should everyone own everything? Not necessarily. I will always maintain that the more one has, the more diversification one needs to hold onto one’s capital. There is also the very real need to be familiar with each class of assets in which one invests. Always stick with what you understand. That is probably the most basic rule of investing, and possibly the best advice I can give to someone starting out. The next piece of wisdom is to never stop learning. By expanding what you know, you will open up new opportunities. It may take years to achieve a level of comfort necessary to actually add a new class of assets to your investment portfolio, but the patience and time it takes to gain the knowledge are worth the wait. As you understand more about each asset, you will also understand that there are better times to invest in each one. Recognizing the best time to invest in a particular asset is important. It also requires patience, a theme you will read throughout many of my articles. Of course, it is possible to invest in just stocks and bonds and cover most of the bases. To get exposure to real estate, one can invest in real estate investment trusts (REITs). To gain exposure to precious metals, one could own gold or silver mining stocks, streamers or ETFs. To gain exposure to bonds, one can invest in bond funds or closed-end funds [CEFs]. There are both benefits and drawbacks to each method of gaining exposure. I intend to get into those issues in another article in this series as well. Promises, promises. I want to spend more time explaining how I allocate my portfolio and how I adjust my allocations across various asset classes in greater detail, but that will need to happen in the next article or two in this series. Again, I am trying to keep the length of each article down to a reasonable level. Patience and Income are the keys to long-term success This is my guiding principle. It may not be yours and that is fine, too. But as I realized that owning assets that pay me to hold them can provide me with more cash to invest, I was hooked. Once I realized that there are companies that increase dividends every year, I never looked back. This worked to perfection in the beginning. Then came the first major stock market correction of my investing life, 1987. It was fast. It was brutal. It unnerved me. That is when I learned about diversifying across asset classes. It also reminded me of how well my friends were doing with their CATS bonds so far. I realized that I needed to do something different if I wanted to protect that which I had worked so hard to accumulate. I have a great story to relay to you about real estate, but I think it will require an entire article to do it justice. I now have income streams coming in from multiple sources, and the income rises each year. I plan to keep that as my short-term goal each year going forward. It really helps to focus on the income side of the portfolio during volatile market gyrations. The value can go up or down in the short term, but as long as the income keeps rising, I can feel good about what I am doing. The longer I do it, the more confident I am in what and how I am doing it. Conclusion If you want to be a millionaire, you need to invest like one. Wealthy people do not need the income from investments so they do not need to invest unless there are bargains available. Think about that for a moment. There are bargains available most of the time in one asset class or another. The key is to identify which one offers the best long-term value at any given time. People who are not wealthy feel like they need to keep all of their cash invested all of the time. That is not how Warren Buffett does it. He likes to always have large amounts of cash available at all times. Have you ever wondered why? It is really simple. He likes having cash available for when a bargain appears. He does not invest just to keep his money working. He invests when he identifies a long-term value opportunity that only comes around infrequently. Buffett considers cash as an option on the future. If you have followed his quotes for very long, you will recognize this concept. What he means is that great investing opportunities will always present themselves at some time in the future if one is patient and persistent enough to wait for their appearance. There is so much more I want to cover, so I will try to submit at least two articles a week in the series for the next few weeks or until I feel most of what I want to write has been written. Until next time, do not rely on luck; rely on wisdom and hard work. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.